Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks.
Japanese industrial policy is going down the pan – in a good way. It is only thanks to help from state-owned Development Bank of Japan that Lixil, the Tokyo-listed building materials group, is to get control of Grohe, Germany’s leading bathroom fittings maker.
Some of Grohe’s faucets sell for €2,000 ($2,780). The entire company – previously owned by private equity group TPG Capital and DLJ Merchant Banking Partners – does not come cheap either. The deal with Lixil values Grohe at €3.1-billion – more than 11 times its 2012 EBITDA. That’s cheaper than Swiss rival Geberit, which trades at around 15 times but still more than the average for sector peers at around six times. It is substantially more than Lixil’s own valuation of 8.4 times, according to Starmine.
While high, the price may still be reasonable. Grohe boasts an impressive record on growth and margins. In the last four years, it achieved annual organic sales growth of 8 per cent. Its EBITDA margin, meanwhile, is 19.5 per cent. Grohe, which owns 72 per cent of Joyou, a Chinese peer, is also well positioned to take advantage of that super-exciting emerging market.
Acting alone, Lixil would have struggled to get its hands on Grohe. Grohe is also valued at almost half Lixil’s own market capitalization. On its own, Lixil’s net debt would have risen alarmingly – from 2.5 times its EBITDA to almost five times, according to Thomson Reuters Eikon data.
But Lixil has found a clever way to tap Grohe’s growth without overextending itself. It has teamed up with the government-controlled Development Bank of Japan. Financial details are sketchy, but taxpayers’ involvement will allow Lixil to contain debt and probably leave it with the financial firepower to continue its expansion. By 2016, Lixil wants to double its revenue to ¥3-trillion yen ($31.2-billion).
Earlier this year, Lixil completed its purchase of U.S. plumbing group American Standard Brands for $542-million (U.S.). Grohe is also eyeing potential further acquisitions, stressing it wants to become a “leading consolidator in the global sanitary industry.” With Grohe and Japanese industrial policy on side, Lixil could be about to clean up.