Johnson & Johnson (NYSE:JNJ) is rumored to be considering acquisition of a local baby-care product vendor Shanghai Elsker in China, a move that could strengthen its foothold in the rapidly-growing Chinese baby-care market. JNJ may have to shell out approximately $100 million dollars on the deal. (Johnson & Johnson seeks acquisition of rival Shanghai Elsker, WantChinaTimes, Aug 02 2012)) Below we try to assess if the acquisition makes sense for the healthcare giant.
We are in process of updating our $74 price estimate for JNJ to reflect the earnings and recent developments.
About Shanghai Elsker
Shanghai Elsker was founded in 2006 and is currently involved in manufacturing of certain baby care products. In addition, the company also imports popular brands from companies in Denmark. and markets them in China. The company, in short time, has built an extensive reach in huge Chinese market has earned its reputation among top retailers including Walmart (NYSE:WMT) and Carrefour for certain market niches like baby skincare products. Further, it has won certifications for the Council of Europe's Guidelines on Good Manufacturing Practices of Cosmetic Products and other ISO quality control standards.
Why Acquisition Could Be a Good Fit
The Chinese baby-care products market has witnessed double digit growth rate in recent times, which is expected to maintain the growth momentum till 2016. With the acquisition, JNJ will gain access to Shanghai Elsker's reputed brands in a fast growing market. While JNJ already has a market leadership position with 50% market share in Chinese baby-care product market, we believe that the company will be better able to garner a larger pie of anticipated growth in the Chinese baby care market. ((Baby and Child-Specific Products in China, Euromonitor, May 2012))
JNJ has a wide sales network in the country and could use its own staff to promote the products of Shanghai Elsker or vice versa, which should result in cost savings with increased sales.
Shanghai Elsker's annual sales revenue is estimated to be in the range of $30 million $45 million per year. The $100 million tag doesn't look that costly to us as JNJ should be able to recover most of it in a short span of time. If JNJ's plan materializes, this could positively impact the value of its consumer healthcare division, which currently contributes about 10% to our current price estimate.
Disclosure: No positions