HUL Acquisition of GSK

Consumer Healthcare

By- Bishwa Ratan

MBA (Finance)
2022-24
Acquisition details
B Hindustan Unilever (HUL) S GSK Consumer Healthcare (GSK CH)

Deal Date – 03/12/2018 (Announced)

Buyer Stock Price 1699.10 1807.65 1699.80

3M Deal date 3M
Product or Market Extension
Type of acquisition
Why was this acquisition made?
The move will help HUL expand its F&R business, which now includes Bru coffee and Lipton tea, to over Rs10,000 crore, from the current
Rs6,500 crore per annum. The deal gives HUL access to brands such as Horlicks, Boost and Maltova malted drinks brands as well as distribution
rights for a five year period over over-the-counter and oral care brands such as Sensodyne, Eno and Crocin. HUL did not have any offering in the
health and wellness based drinks (HFD) segment prior to the deal. Related titles HUL also gets access to GSK CH's network of 800+ distributors
and 800,000+ retail outlets
Should it have been an Acquisition?

The potential deal is win-win for both the parties as the acquisition of strong brands in the health food drinks category would enhance the
margin of HUL's food business by 900 basis points to 27% from current 18% of sales with sustainable profitable growth. The contribution of
foods businesses in HUL's revenues will rise to 28% from the current 18%.

Although GSK Consumer Healthcare is more profitable at present, generating an Ebit (earnings before interest and tax) margin of 20% vis-à-
vis HUL's 17%, it has much scope for improvement. A limited product portfolio and lack of scale was a constraint for GSK Consumer in India.
HUL can use its much larger distribution network to improve the reach of GSK Consumer's products. Besides, merger synergies, such as the
elimination of duplicate cost heads, will result in a bump in margins as well.
Reasons for acquisition

The acquisition is in line with the Hindustan Unilever strategy to build a sustainable and profitable Foods and Refreshment (F&R) business in
India by leveraging the mega trend of health and wellness. The move will help HUL expand its F&R business, which now includes Bru coffee
and Lipton tea, to over Rs10,000 crore, from the current Rs6,500 crore per annum. GSK CH India is the market leader in the HFD category,
with iconic brands such as Horlicks and Boost, and a product portfolio supported by strong nutritional claims. The average growth rate has
been double digit over the last decade, and the category still remains under-penetrated in India. HUL is well positioned to further develop
the market given the extent of its reach and capabilities. They can increase penetration with special focus on rural markets and emerging
channels and expand their offerings to the fast-growing premium segment.

HUL can drive significant cost synergies from a combination of supply chain efficiencies and operational improvements, go-to-market and
distribution network optimization, scale in a number of cost areas such as marketing and streamlining of overlapping infrastructure. HUL won
a non-cash deal. For parent Unilever to be able to use the stock of its Indian subsidiary as currency is quite a luxury.
Acquisition -
• Full acquisition of Health Food Drinks Portfolio (GSK HFD) of GlaxoSmithKline (GSK) in India, Bangladesh and 20 other predominantly
Asian markets.

• Full acquisition was necessary to give HUL the freedom necessary to enhance the business.

• GSK was also looking to leverage its CH business in India to fund its $13 billion buyout of Novatis’s stake in a global consumer healthcare
joint venture

Method of Payment Full Stock

• GSK is valued at Rs 31,310 Crores for which HUL is issuing 18,46,23,812 Shares at a swap ratio of 4.39 Shares of HUL for each GSK share.

• Equity shares being currency of the acquisition in the case of growing listed companies is financial, tax and compliance efficient thereby
removing all frictions in various approvals and cash flow required even to fund open offer is eliminated. Using equity share as currency of
the acquisition is not only beneficial to the shareholders of both the companies but also will not create any cash crunch on the balance
sheet of the merged entity nor the merged entity will have to borrow to finance the acquisition.

• An outright buyout would have meant a large capital gains tax (LTCG tax), given that it would be a transaction conducted outside the stock
exchanges.

• It avoids the rigmarole of an open offer for GSK Consumer's shareholders, and the possibility of having two listed subsidiaries in India.
Valuation
Amount of valuation? Rs. 31700Cr.

How was it calculated? Total shares of GSK CH – 4.21 Cr.

Swap Ration – 4.39
Total Shares of HUL – GSK CH – 18.4819 Cr.
Total Investment Value – 18.4819*1717 = 31733.42 Cr.
Promoter Holding (GSK) – 72.49%
Total Share To GSK – 13.4
Investment Value of GSK – 13.4*1717 = 23007.8 Cr.

Premium Amount ? ~ 6% premium to November 30,2018 close for GSKCH shareholders.

GSK CH has been valued 7 times its turnover and 30 times its operating profit.

HUL (post-merger) could see 8-9% EPS upgrade. Assuming full synergy benefits at 10% of sales, flowing through in FY21E,
GSKCH's net profit would increase by -33%. If we give a PE multiple of 35x to the revised net profit, the 1-year forward fair
value of GSKCH comes at Rs12,020 per share. Instead, given the swap ratio of 4.39:1, HUL would be effectively paying
"Rs7,700 per share. GSK CH is the leader of the HFD category with household and iconic brands such as Horlicks and Viva. The
acquisition propels HUL into the top of this category. Hence the premium is justified.
Post Script
+tive
• The acquisition is in line with HU's strategy of building a strong food and refreshment portfolio by leveraging the mega trend of
health and wellness Currently its offerings are only in soups, tea ice-cream, coffee, ketchup and other packaged foods GSK CH is the
leader in the 17,000-crore HFD Health Food Drinks) category with its Horlick's brand being No1

• HUL’s distribution is 4x that of GSKCH. HUL could unlock the potential of northern and western markets where GSK is weak with
combination of innovation and distribution, HUL’s learning of the sachet market across various categories could be applied to GSA
brands to drive penetration and new user recruitment Management of HUL indicated strong focus on rural penetration for the 601
products (current rural penetration is 14% in rural India and overall penetration is 24%)

• HUL has no presence in distribution of pharma products it's win of the five year distribution rights for GSX CH's over-the-counter
(OTC)brands such as the antacid Eno, the painkiller Crocin, and Sensodyne gives HUL an opportunity to understand the OTC drug
business for future penetration may also leverage its strong distribution network to distribute more such OTC products in the future
from other brands leveraging thus experience.

-tive
• Growth for brands like Horlicks had plateaued, according to various estimates, the category is expected to grow by 2017 and 2022,
according to data from Euromonitor.

• GSK’s 4000 employees have to be absorbed by HUL

• HUL has no prior experience in the segment.

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