Will the Massmart/Walmart ghost haunt Adcock?

Local pharmaceutical giant, Adcock Ingram, stands to be taken over by Chilean group, CFR Pharmaceuticals, in a $1.3bn (R13bn) deal announced yesterday.

Will this proposition which seems to be supported by the Adcock Ingram board attract the kind of protest noise experienced when US retailer Walmart was circling local operator Massmart? The sponsors of this deal seem to have learnt from past transactions and have wrapped their proposition in a language that seeks to address local interests.

Adcock Ingram’s chairman Dr Khotso Mokhele said “Adcock Ingram’s Independent Board believes there is a compelling rationale for a combination of CFR and Adcock Ingram. The companies have complementary product portfolios, business structures, geographical presence and manufacturing footprints, and the combination of the companies would deliver value not only to shareholders, but also to employees and South Africa at large.”

Mokhele added that “Should these discussions eventuate in a transaction, it would represent a significant foreign direct investment into South Africa, enhancing South Africa’s reputation and profile as an attractive investment destination”.

The fundamentals of the Adcock Ingram/CFR proposal are almost the same as those of the Walmart/Massmart marriage. A foreign firm is coming onto our shores to takeover a local giant.

We could go further and say the proposed Adcock Ingram/CFR deal belongs to a long list of takeovers of South African firms by multinationals. The list will include Barclays/Absa, ArcelorMittal/Iscor, Norton Rose/Dennis Reitz, Glencore/Optimum Coal etc.

Such deals are naturally unsettling to many local stakeholders who worry that foreign firms don’t understand key local rhythms and mainly the socioeconomic fundamentals. In the Walmart/Massmart case, the issue of protecting local jobs pillared the protest noise which came from unions and also government. The concern was that local industry may lose in the integration of Massmart into the globalised Walmart procurement chain. That concern is informed by the fact that these globalised procurement chains veer towards low cost centers. South Africa may not pass as a low cost center. This then raises the possibility that such deals will lead into export of local jobs to problematically cheap production centres.

In the announcement released yesterday sponsors of the CFR/Adcock Ingram transaction seek to address these concerns. The announcement said CFR has indicated that it has no plans for retrenchments. “If anything, the expectation is that the impact of the combination on employment will be positive. In addition, CFR has committed to ensuring that Adcock Ingram remains appropriately empowered”.

The statement added that the proposed transaction will create a leading, diversified, emerging markets pharmaceuticals company helping over two billion patients in more than 23 countries. CFR will seek a secondary listing on the JSE.

“If a transaction materialises, CFR has indicated that the Adcock Ingram brands will be preserved and extended into new markets. Adcock Ingram’s current manufacturing facilities would play a key role in the combined group which would shift production of certain products to South Africa and India”.

Talk is cheap. We at ujuh.co.za hope that South Africa has developed strong institutional framework to ensure that this talk translate into action. The economic gains of this transaction must be significant enough to make up for the huge intangible losses that are going to be suffered if the transaction goes through. We have always maintained that such transactions must be viewed through dynamic lenses that account for softer issues. We take a view that it is important for our kids and their kids to grow up seeing local symbols of success.


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