It's not uncommon for one company's failure to be another's opportunity. Built through aggressive acquisition, Brazil's Hypermarcas (HYPMY.PK) had leading brands in branded drugs, generics, personal care, home care, and food. Not so long ago, Hypermarcas looked like it was on the way to becoming Brazil's answer to Unilever (UL), Procter & Gamble (PG), or Johnson & Johnson (JNJ), but those plans have gone seriously awry.
Shrink To Survive
At the risk of oversimplification, Hypermarcas got too big too fast and pursued quantity (size) over quality. With a hefty amount of debt on the balance sheet, the company made itself vulnerable to performance shortfalls and that's exactly what happened.
As 2011 went on, the company saw major shortfalls in its sales and profits and suddenly the pressures of its debt load and covenants began to loom large. Worse still, it wasn't just a case of the Brazilian economy taking a step down. True, inflation worries led distributors and major retailers to adjust their buying habits, but Hypermarcas saw major erosion in its leading brands as rivals like Procter & Gamble, Unilever, and Colgate-Palmolive (CL) pressured the company in personal/health care and companies like Brasil Foods (BRFS) and JBS (JBSAY.PK) thumped them in foods.
The end result of this pressure was that the company's management felt it had to undo a lot of its expansion in order to better survive. Deciding to reconsolidate around pharmaceuticals and personal care, Hypermarcas sold its food businesses and most of its home care to companies like Quimica Amparo, JBS, and Bunge (BG).
The New Hypermarcas
Hypermacas is now split between its pharmaceuticals, personal care, and health/infant care operations, with the drug business making up about half of the revenue base.
Hypermarcas remains one of the largest drug companies in Brazil, alongside EMS, Ache, and Sanofi's (SNY) Medley. Much of the company's business is in over-the-counter medicines (which is heavily regulated by the Brazilian government), but the company has been working to grow the prescription and generics business and already has the largest branded generics business in Brazil.
Outside of drugs, Hypermarcas has a Procter & Gamble/Colgate-Palmolive-style beauty and personal care business with a range of hair care, skin care, oral care, and beauty brands. There are also shades of Kimberly-Clark (KMB) here, with a sizable diapers business.
Time To Sell?
Even with the divestitures, Hypermarcas has some meaningful ongoing issues. Debt could still be an issue, as the company's asset sales did not generate all that much cash. What's more, it's unclear at this point if the company really has the leverage, resources, and know-how to develop its brands effectively and stave off of the growth of competitors both local (Natura) and foreign (Unilever, P&G, Colgate, et. al).
As it stands today, though, Hypermarcas' problems would not be so overwhelming to a large buyer. A company like Johnson & Johnson, Pfizer, or Teva (TEVA) could use the added exposure and leverage to the Brazilian drug market, and both JNJ and Pfizer are comfortable running consumer product businesses as well.
What's more, it's not hard to see how Hypermarcas could be easily "parted out" - a drug-oriented company like JNJ or Pfizer could keep the drug and health care businesses and find ready buyers for the personal care and diaper lines. The same would likely hold true in reverse - should Colgate, Unilever, or some other personal/home care corporation want to expand its brands in Brazil, it would likely not be hard to find willing buyers for the drug business.
More Valuable To Strategic Buyers Than Investors?
As it stands now, Hypermarcas is just not an especially interesting stock for investors to consider. Fixing what has gone wrong is going to take substantial time, and there's a real risk that that interval will see larger rivals gain more share in the attractive and growing Brazilian market. An optimistic assessment of Hypermarcas' growth suggests the stock is at best fairly priced today and may have 10-20% downside.
To a strategic buyer, though, it's a different picture. Brazil's economic growth is creating a larger consumer class and more and more opportunity for OTC drugs, personal care and health care products. It's not as though Hypermarcas doesn't have worthwhile brands; they just can't seem to really do much with them. All things considered, then, investors should not be surprised if companies like JNJ, Pfizer, Colgate, or P&G look to acquire and dismantle this once-promising Brazilian consumer conglomerate.
Disclosure: I am long BRFS.