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Has Osim too much on its acquisition plate?

WILL Osim International suffer growing pains? That's a fair question to ask of the healthcare group, considering its two major acquisitions in quick succession.

Last Friday, Osim announced that it would lead a consortium - including a unit of Singapore investment company Temasek Holdings - to mount a US$456 million acquisition of all of Nasdaq-listed US retail group Brookstone Inc.

The acquisition comes even before the completion of Osim's general offer for regional nutrition products distributor Global Active Holdings, which holds General Nutrition Centre (GNC) franchises in the Asian region.

Integrating one acquisition is challenging enough, but Osim now faces the task of making two major acquisitions work at the same time. And it is well established by now that the majority of mergers and acquisitions do not quite work out as hoped.

The concern is that Osim may find itself stretched in management resources as well as financially.

Osim has attempted to address the issue of management resources by pointing out that the three companies, Osim, Brookstone and Global Active, will be managed separately. Still, as a small company, it really can't be business as usual for Osim. For one, it would have to appoint directors to both Brookstone and Global Active. Brookstone also presents a cultural challenge in integration, while Global Active, rocked by successive profit warnings and management upheaval which saw the suspension and reinstatement of its CEO, would probably require close attention. So even with separate management teams, Osim's management time and focus will be spread wider over three companies instead of just one previously.

Will Osim be stretched financially? It will be taking on debt to fund its acquisition of Brookstone, in contrast to its current cash-positive position. The transaction will be funded by a combination of US$248 million in equity and US$205 million in debt plus cash on hand. For the equity portion, Osim will invest US$90 million for a 55 per cent stake while Temasek and US buyout specialist JW Childs Associates LP (JWC) will contribute a total of US$150 million for a 40 per cent stake. Another US$8 million will come from the management of Brookstone, representing a 5 per cent stake.

With its current net cash of S$9.8 million, Osim will fund its US$90 million equity investment in Brookstone through bank borrowings, which will produce a net gearing of 1.1 times. Osim has indicated that the loan can be repaid with its operating cash flow over 5-6 years. Factoring in its takeover of Global Active, Osim's net gearing will rise to 1.3 times by end-FY05, which is probably its record high, according to one broker estimate.

For the risks, what will Osim get? The proposed acquisition represents a major leap for home-grown Osim, best known for its massage chairs. Brookstone is a nationwide product developer and specialty retailer in the US with 288 outlets located in high traffic regional malls and airports. It sells products ranging from massage chairs to outdoor tools, according to the US company's website. It has a proven management team.

The deal gives Osim instant access to the huge US market with about 100 million households which are paying more attention to a healthy life-style. It also turns Osim into a global player with a network of 991 outlets in 23 countries and over 100 cities in the world. And the acquisition will start contributing to Osim's earnings as early as the third quarter of this year. Also providing comfort to the deal is the participation of Brookstone's management in the acquisition, and that of Temasek.

Osim has clearly charted for itself a highly ambitious growth path. Such a strategy can never be risk-free. On balance, what the Brookstone acquisition promises justifies the risks. It's now up to Osim to make it work.