In February 2022, electrical consumer goods player, CG Consumer (Crompton Greaves Consumer Electricals) acquired South India-based kitchen appliances company Butterfly (Butterfly Gandhimathi Appliances). The acquisition of a listed company by another listed company creates a buzz because of the size of the deal. As part of this deal, CG Consumer will buy out the promoter's stake and will acquire a controlling interest in the company with an 81% stake for around Rs 2,077 crore. 

Mergers and acquisitions are a growth strategy used by many businesses to target new markets, products, or services and even acquire established products that are complementary to their own. CG Consumer chose to acquire Butterfly to expand its appliances portfolio and expand its geographical reach. Butterfly has leadership in some of its products and a strong presence and brand recognition in South India. This deal will also help CG Consumer strengthen its presence in the south.

Apart from acquiring a 55% stake from the promoters, CG Consumer will make a mandatory open offer to the public shareholders of Butterfly to acquire up to 26% stake in Butterfly at Rs 1,433 per equity share, aggregating up to Rs 666 crore. The total consideration is expected to be around Rs 2,077 crore for a nearly 81% equity stake. The existing promoter’s stake will reduce to 9% in Butterfly and they will be classified as public shareholders. The new management from CG Consumer will take over key management positions in Butterfly. Rangarajan Sriram, Vice President of Crompton Fans will lead Butterfly as CEO.

Quick Takes 

• CG Consumer will acquire up to 55% stake from promoters of Butterfly Gandhimathi for a consideration of Rs 1,380 crore at a price of Rs 1,403 per share
• CG Consumer will also acquire trademarks from promoters of Butterfly Gandhimathi for a consideration of Rs 30 crore
• CG Consumer’s contribution from appliances is expected to increase to 24% of total revenues from current 10%
• Butterfly will remain a listed entity and the final call on delisting/merger will be taken by the board of directors of both companies at a later date
• CG Consumer to set up a manufacturing unit on 12 acres of land parcel in Tamil Nadu acquired as part of the deal from Butterfly Gandhimathi

What makes Butterfly a suitable target for acquisition?

Butterfly Gandhimathi is among the top three kitchen and small domestic appliance players in India. Butterfly’s product portfolio includes a complete suite of kitchen appliances including mixer grinders, wet grinders, pressure cookers, stainless steel vacuum flasks, LPG stoves and non-stick cookware. In South India, Butterfly leads the market in wet grinders and LPG stoves and occupies second place in the mixer grinders category.  

The last five years saw Butterfly’s sales increase consistently YoY ending FY21 with a revenue of Rs 871.2 crore. The 9MFY22 revenues stood at Rs 807.1 crore, a 21.5% increase over the previous period of 9MFY21. Over the last five years, it has improved its profitability from bearing a loss of Rs 51.8 crore in FY17 to generating net profits of Rs 36.2 crore in FY21.

CG Consumer’s revenues were at least five times greater than Butterfly Gandhimathi's in FY21. CG Consumer recorded revenues of Rs 4,825.6 crore in FY21 along with net profits of Rs 604.7 crore. Butterfly’s product will help CG Consumer expand its range of small domestic appliances and a complete kitchen-focused portfolio gets added to CG Consumer.

CG Consumer’s product mix is fairly diversified. Fans constitue 41% of revenues, followed by pumps with 25%. Currently, appliances constitute only 10% of revenues, and CG Consumer expects the Butterfly acquisition to help it grow this segment’s revenues. 

CG Consumer is the leading seller of fans in India, but its market share is shrinking with aggressive competition from players like Havells, Bajaj Electricals, and Polycab. Similarly, its ability to grow the pumps and lighting segments is limited due to competition, pricing pressure, and the presence of many organised and unorganised players.

On the other hand, Butterfly’s product mix is completely focused on kitchen appliances. More than half of its revenues are driven by two products–mixer grinders contributing 29.1% and LPG stoves contributing 25.7%. The rest comes from products like pressure cookers, wet grinders, and other kitchen utilities.

CG Consumer's current range of appliances includes geysers, coolers, irons, room heaters, and mixer grinders. The acquisition of Butterfly is a favourable option for CG Consumer to grow its appliances segment. There is an overlap of only one product (Mixer grinders) between the two, which gives CG Consumer access to a new set of established products. (LPG Stoves, wet grinders, pressure cookers, etc).

According to CG Consumer’s investor presentation, it expects the appliances segment to contribute to 24% of the revenues, up from the existing 10%, post the acquisition. Taking the base of FY21 revenues, this means there could  be an 18% increase in total revenues to Rs 5,670 crore for the combined entity in FY23.

Prior to the acquisition, CG Consumer's plans included adding dealers for its products in areas with a population of 10,000-100,000 in the next five years. Post the acquisition Butterfly would also benefit in penetration in these smallest towns as the dealers would offer Butterfly products also.

Synergies due to respective geographical strengths

Butterfly has a strong presence in South India with 76% of sales from this region. This gives CG Consumer a strong foothold in the region where it can expand its other segments through Butterfly Gandhimathi’s dealerships.

Apart from this, CG Consumer also gets a 12-acre land parcel in Tamil Nadu as part of the deal. This can be utilised either for appliances or for putting up a manufacturing plant for any other segment in South India. Also, CG Consumer’s pan India presence will help Butterfly appliances scale faster in the rest of India.

Immediate actions are needed in certain operational areas

Butterfly’s EBITDA margin was much lower at 9% in FY21 against CG Consumer’s 15%. The lower EBITDA margin is on account of rising raw material costs, higher advertisement, and other expenditures. Streamlining costs at Butterfly Gandhimathi would be a priority for CG Consumer. However, the EBITDA margin of Butterfly is likely to remain under pressure in the near term due to higher raw material prices.

CG Consumer can benefit from the deal by leveraging Butterfly’s manufacturing facilities, R&D capabilities and capitalising on distribution strengths in the dealer network as well as across e-commerce platforms. Depending on the actions taken in the next few quarters, this deal can potentially result in a successful diversification of product lines and a win-win situation for both companies.