Mergers &
Acquisitions Project
HUL & GSK CH
HUL: Usmani(25A)|Mahak Jain (24B)|Saivi Nijhawan (38B)
Md. Zahid
Overview
Hindustan Unilever Limited (HUL)
Hindustan Unilever Limited (HUL) is an Indian consumer goods company headquartered in
Mumbai, India.[3] It is a subsidiary of Unilever, a British-Dutch company. Its products include
foods, beverages, cleaning agents, personal care products, water purifiers and other fast-
moving consumer goods.
HUL was established in 1931 as Hindustan Vanaspati Manufacturing Co. and following a
merger of constituent groups in 1956, it was renamed Hindustan Lever Limited. The
company was renamed in June 2007 as Hindustan Unilever Limited. Hindustan Unilever's
portfolio had 35 product brands in 20 categories.
Top Executives
Mr. Sanjiv Mehta Chairman and
Managing Director HUL
50000
Mr. Ritesh Tiwari Executive Director, 40000
Finance & IT and 30000
Chief Financial Officer 20000
10000
Mr. Dev Bajpai Executive Director, 0
2017-18 2018-19 2019-20 2020-21
Legal & Corporate Affairs
and Company Secretary Revenue (INR crores )
Key Brands
Surf excel, Rin, Wheel, Sunlight
Vim, Pureit, Lux, Lifebuoy, Dove, Fair & Lovel
Pond’s, Vaseline, Clinic Plus, Sunsilk
Indulekha, Lakmé, Pepsodent, Closeup
Axe, Rexona, Hamam, Brylcream
Kwality Wall’s, Knorr and Kissan
Annapurna, Brooke Bond, Lipton, BRU
Revenue: Rs. 45,311 crores
EBITDA: Rs 11,837 crores
EPS: Rs. 33.85
Major Businesses
Food & Refreshments
Home Care
Beauty & Personal Care
Life Essentials
Shareholders
Total Promoter Shareholding 67.18%
Public Shareholding (Institutions) 18.77%
Public Shareholding (Non -
14.05%
Institutions)
Share Price
GlaxoSmithKline Consumer Healthcare Limited (GSKCH)
Overview
GSK Consumer Healthcare Ltd is an associate of GlaxoSmithKline plc.of U.K, one of world’s largest
consumer healthcare companies. We have a heritage that goes back over 160 years. The purpose is
to help more people around the world to do more, feel better and live longer with everyday
healthcare products. They are one of the world’s leading over-the-counter (OTC) medicines
company. They hold number one positions in OTC medicines across 36 markets, and are market
leaders in specialist oral care. GSK has more than 80 manufacturing sites globally and have their
R&D into two major hubs, in Stevenage, UK, and in Philadelphia, US.
Key Executives
P Dwarakanth Chairman
Sridhar Venkatesh Managing Director
Anup Dhingra Director-Operations
Shanu Saksena Company Secretary
Products Divisions:
Consumer Healthcare
Digestive Health
Pain Management
Respiratory
Oral Care
Pharmaceuticals
Net Sales: Rs 4782 Crores
Market Capitalization: Rs 43053.88 Crores
Source : https://www.edelweiss.in/quotes/equity/glaxosmithkline-consumer-healthcare-ltd-231
Share Price
Business Strategy:
As the business continues to change shape, they are transforming the way they operate so
that they can reduce complexity and become more efficient. This frees up resources to
reinvest elsewhere in the business, or return to shareholders wherever the most attractive
returns.
Being a responsible business is central to the strategy, and how they deliver success is just as
important as what they achieve. Ensuring the values are embedded in the culture and
decision-making helps to better meet the expectations of society.
They have changed the R&D organisation so that it is better able to sustain a pipeline of
products that offer valuable improvements in treatment for patients and healthcare
providers.
They have been creating a more balanced business and product portfolio, capable of
delivering sustainable sales and earnings growth and improved returns to shareholders.
Acquisition Facts and Figures
Announced in: Dec 2018
Deal Value: Rs. 3,045 Crore
Value Equation: An all equity deal, share swap ratio – 4.39 HUL shares
for every 1 share held in GSK CH India
Deal Structure: GSK Plc to own 5.7% of merged entity. Unilever
shareholding in merged
AT&T issued 1,185M shares of common stock and paid $42.5B in cash
Completion Date: April 2020
The 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.
Reason for 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.
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 Novartis’s stake in a global consumer healthcare joint venture.
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 oer 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.
Strategic Fit and Value Creation
Synergies
Synergy estimates will begin to accrue from FY 2021 with an approximate impact of 8-10%
on both revenues and costs.
The deal is EPS accretive. GSK CH contributes to ~14% of HUL’s APAT of FY18. Equity dilution will
result in ~5% accretion of EPS in HUL (without synergy benefits)
The dilution will lower down Unilever’s holding to 61.9% vs. 67.2% currently
Majority of HUL’s categories have penetration levels >70% despite long term avg. volume
growth is at ~7%.
An underpenetrated category with scope for premiumisation gives long-term growth visibility
HUL has the capability to drive deeper penetration vs. GSK CH owing to its deeper distribution
reach (>8mn stores vs. 1.8mn) and higher quality of reach
Transaction Cost: Business has an IT Transition Services Agreement with GSK Plc for 12
months: ~Rs 80 Cr
Export Reporting: Exports to move to HUL subsidiary UIEL – visible in consolidated results
Integration Cost: Investments to realize synergy benefits in near-to-medium term
Distribution Arrangement: 5-year Consignment services agreement signed between both
parties with clearly agreed roles & KPIs on both sides, mutually renewable at the end of
term
Considerations Paid
Equity Shares: 18.44 Crores
Share price on effective date: INR 2,179,7
Considerations: INR 40,242 Crores
Excess of Considerations over identified Assets & Liabilities to be recorded as “Goodwill”
Accounting:
Infinite life intangibles will be recorded at Fair Value and tested for impairment
Finite Life intangibles will be recorded at Fair Value and depreciated over useful life
Tax Books:
All intangibles (including goodwill) will be added to intangibles tax block
Intangibles eligible for depreciation under section 32 of the Income Tax Act
The difference in the value of intangibles in financial and tax books is in the nature of
“temporary difference” and will be subject to deferred tax at every period end.
Valuation of GSK Consumer Healthcare
Valuation of combined firm & Synergy Benefits
Valuation Summary
Value of GSK 7079 Value of Synergy 3870
Sum paid by HUL 7537 Acquisition Premium 457.40
Post-Merger Scenario
• Seamless cutover completed, successful first quarter
• Medium term – Growth in double digit, incremental margins of 550-700 BPS (250-300 BPS
synergies already realised)
Risks and Challenges
• Although the structural opportunity is intact, COVID uncertainties will affect in the near term
• Synergy benefits will begin from FY21 onwards.
• 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.
