Condom Sales in Eastern Europe to Bolster Durex Maker

SSL International Plc Chief Executive Officer Garry Watts is taking the manufacturer of Durex condoms to eastern Europe just as the region’s economic meltdown turns investors away.

The U.K. maker of Durex and Contex brands plans to raise its stake in a unit that distributes contraceptives in Russia and nine other eastern European countries to 50 percent by April and expects to take full ownership by 2010, Watts said. The 200 million-pound ($283 million) takeover will raise SSL’s sales in the region by 100 million pounds a year starting from April.

“Russian people aren’t going to stop having sex any more than British people are,” Watts, 52, said in an interview in London. “We’re not immune from the downturn, but it’s a bit like Pizza Hut: If you’re not going out, then you might be willing to drop a five-pound vibrator ring into your trolley.”

Kraft Foods Inc., Alcoa Inc. and Volkswagen AG are among companies that halted expansion plans and curtailed production in Europe’s former communist countries as their economies and currencies slumped. Since joining SSL in 2001, Watts has pushed the London-based company to expand outside its home market, entering eastern Europe last year by buying a 15.5 percent stake in Beleggingsmaatschappij Lemore BV for 24.6 million pounds.

Huge Markets

“Although the region is under pressure at the moment,” BLBV gives SSL “access to huge markets with massive populations,” said Martin Todd, an analyst with Scottish Widows Investment Partnership, which bought 1.07 million shares in November for a 1 percent stake. “SSL is growing in China and Russia, so those are the long-term growth markets for them.”

About 90 percent of newly reported HIV cases in Eastern Europe and Central Asia were in Russia and the Ukraine in 2006, according to a UNAIDS report. Infection rates are as much as eight times higher than in the U.K, France and Germany, according to U.K.-based AIDS awareness charity Avert.

Beleggingsmaatschappij Lemore, or BLBV, has about 60 percent of Russia’s condom market and sells the contraceptives throughout eastern Europe. SSL supplied about 400 million condoms, about 20 percent of the company’s total production, to BLBV in 2008.

The February transaction included an option for SSL to raise its stake to 50 percent for a price based on 2007 earnings before interest, taxes, depreciation and amortization and acquire the rest for an amount similarly linked to 2009 profit.

Share Sale

SSL fell 7.5 pence, or 1.6 percent, to 467.5 pence in London. The stock had gained 3.7 percent in the six months before today, compared with a 25 percent drop of Trojan condom-maker Church & Dwight Inc. The MSCI U.K. Small Cap Index fell 47 percent. SSL raised 87.3 million pounds in a share sale in January.

BLBV could boost SSL 2011 earnings before interest, taxes, depreciation and amortization by 22 million pounds, according to Sally Taylor, an analyst at house broker JPMorgan Cazenove Ltd., who rates the stock “outperform.” Four analysts surveyed by Bloomberg recommend buying the shares, and one advises selling.

SSL also makes Scholl shoes and foot-care products which it plans to distribute through BLBV. Scholl sales account for 43 percent of the company’s total, about the same as Durex. About 40 percent of SSL’s sales in fiscal year 2009, which ends in March, were in the euro region and about 25 percent elsewhere in Europe. The remainder where in Asia and the U.S.

Pound Benefit

The pound has plunged 13 percent against the euro in the last year. SSL makes most of its sales in western Europe and books them in pounds.

The economies of eastern Europe will shrink an average of 0.4 percent this year, the International Monetary Fund said Jan. 29. Latvia, Hungary, Serbia, Ukraine and Belarus have all received IMF bailouts. SSL is ramping up its presence while other western European small-caps such as Vetropack Holding AG or Dutch-Israeli Kardan NV are forced to scale down eastern operations.

SSL reported a first-half profit of 22.6 million pounds compared with a loss of 16.1 million pounds a year earlier. Full- year 2009 earnings before interest and taxes will increase more than 30 percent because of favorable currency rates, the company said in January.

Chinese Factory

The company will open a new Chinese factory with the capacity to produce one billion condoms annually in July, Watts said. SSL has not ruled out further acquisitions in countries such as Japan, Korea, Germany or South America.

Other acquisitions completed within the last two years include the purchase of Swiss condom-maker Crest for 4.6 million pounds in December 2008 and orthotic insole brand Orthaheel in November 2007. The company also took over Qingdao London Durex, in which it already controlled a 50 percent stake, for 19.1 million pounds in January 2007.

Standard Life Investments purchased 1.8 million SSL shares as of Nov. 3, raising its stake to 2.18 percent, according to filings. Blackrock Inc., the largest publicly traded U.S. asset manager, is the biggest shareholder with a 13 percent stake.

SSL’s expansion in eastern Europe bucks a trend that’s gathered pace since Ukraine’s credit rating was cut two levels to the lowest in Europe on Feb. 25, just one day after Latvia was downgraded to junk.