French stationery maker BIC Group has acquired a 40% stake in India's Cello Group for $160 million (Rs 790 crore). The deal values Cello at a whopping $400 million  and the acquisition is expected to be completed by early 2nd quarter 2009. BIC also has a call option in 2013 to increase its stake to 55% at a price based on a formula tied to earnings. Cello has revenues of Rs 410 crore for the year 2007-08 and an EBIT margin of 30%.

The deal has been financed by BIC mostly through USD denominated bank loans. Also BIC has said that 40% of Cello Pens net income will be accounted through the equity method and acquisition is expected to be EPS accretive from 2009.

Privately-held Cello was founded in 1995 by the Rathod family. The company claims to be the country's largest manufacturer and distributor of writing instruments, with a 37% domestic market share. It also has a presence in Africa, Middle-East and Asia. and has approximately 5,000 employees.

As the world economy slows down, and there is a general fall in demand for goods, especially in the developed world, BIC seems to be looking at emerging market of India. Currently 68% of BIC's revenues come from developed markets of North America, Europe and Japan. The total stationery market in India is expected to be about Rs 9,000 crore, with notebooks and paper accounting for 63% of it.

Cello is the market leader in the pen and other stationery, and its other unlisted peers include Reynolds, Luxor and Add Gel Pens. There also some listed companies in this space. Linc Pens & Plastics has revenues of about Rs 177 Cr and net profit of about Rs 5 Cr for 2007-08. Linc has market capitalisation of Rs 16 Cr. Another such listed firm is Today's Writing Products Ltd, who has revenues of Rs 216 Cr and net profit of about Rs 13 Cr. Today's has market capitalisation of Rs 30 Cr.

"One of the reasons for the success of BIC's strategy since the beginning has been to build an international presence. India is one of the largest and fastest growing markets in the world," said Bruno Bich, BIC Chairman of the Board, in a statement.

Cello Pens is a vertically integrated manufacturer with facilities, in-house research, product development and marketing capabilities. The deal would give BIC access to Cello's distribution and marketing network in India. With mid to high-single digit annual growth, India is one of the world's largest stationery markets.

"Having an extensive sales and distribution network in this industry is worth a lot," says Abhishek Maheshwari of Kubera Cross-Border Fund, which has invested $20 million in Kejriwal Stationery. But Kejriwal is focused on export markets and produces paper-based stationery products.

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