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HUL to pour Horlicks into its portfolio with GSK deal

ET Bureau|
Updated: Dec 04, 2018, 09.54 AM IST
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Unilever buys GSK's Indian Horlicks business for 3.3 billion Euros
Unilever buys GSK's Indian Horlicks business for 3.3 billion Euros

Highlights

  • The transaction is worth Rs 31,700 cr
  • The all-equity merger deal includes an exchange ratio of 4.39 HUL shares
  • With the HUL deal, the 140-year old brand will retain its British ownership
Mumbai | New Delhi: Hindustan Unilever Ltd (HUL), the Indian unit of Unilever Plc, will merge GlaxoSmithkline Consumer Healthcare with itself in an allstock deal that will give the country’s largest pure-play consumer goods company access to 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.

The merger values GSK Consumer Healthcare at Rs 31,700 crore and its shareholders will get 4.39 shares of HUL for each of their share. After the merger, which is expected to be completed in a year, Unilever’s holding in HUL will fall from 67.2% to 61.9%. GSK Plc will become the second-largest shareholder in the merged entity with 5.7% stake. It can offload its stake to any investor and Unilever does not have exclusive rights to buy these shares.

Boost, Viva and Maltova brands will be owned by Hindustan Unilever.
However, the Horlicks brand, which is currently owned by GSK Plc, is being acquired by parent Unilever and HUL will pay royalty for its use in India.

“This is a very strategic and transformative move for us. Once the merger is complete, we see significant synergies in terms of top line and costs,” said Hindustan Unilever chairman Sanjiv Mehta on Monday. “From the lens of Indian consumers, health and wellness is a big need. This (the merger) squarely fits into that space and (it) makes immense sense to get into this category from a strategic point of view.”

HUL shares jumped 4.12% to close at Rs 1,825.90 on the BSE. GSK Consumer Healthcare shares rose 3.75% to close at Rs 7,542.85 apiece, translating into a market cap of Rs 31,721crore.

The merger will significantly bolster HUL’s food and refreshments portfolio.

Win-Win

With GSK Consumer Healthcare’s annual sales of Rs 4,200 crore, HUL’s revenues for this business will exceed Rs 10,000 crore after the deal is completed, making it one of the largest food companies in the country. GSK’s brands will also see a three-fold jump in distribution since HUL reaches over 8.2 million retail outlets in the country.

“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. Deal is also positive for shareholders of GSK Consumer in view of better value under the share-swap deal,” said Kaustubh Pawaskar, research analyst at BNP Paribas.

In addition to the India leg of the transaction, GSK Plc is also selling its 82% stake in GlaxoSmithKline Bangladesh Limited and other related brand rights for GSK’s consumer healthcare nutrition activities in certain other territories to Unilever, for which it is expected to receive cash proceeds worth £566 million, or Rs 4,987 crore.

This could possibly be the last M&A activity under outgoing Unilever CEO Paul Polman. Many of Unilever’s recent acquisitions have focused on beauty and personal care products.

In March this year, GlaxoSmithKline Plc chief executive Emma Walmsley had announced a strategic review of Horlicks and other consumer healthcare nutrition products, adding that the company was exploring a partial or full sale of its stake in Indian subsidiary GSK Consumer Healthcare by the yearend.

This was triggered by GSK looking to help fund its $13-billion buyout of Novartis’ stake in their consumer healthcare joint venture.

Several leading consumer goods companies had evinced interest in the consumer healthcare nutrition business, but Unilever finally edged past Nestle in a competitive auction.

GlaxoSmithKline Plc chief strategy officer David Redfern said India remained an important market for his company.

“The company will continue to invest in growth opportunities for its over-the-counter and oral health brands, which include Crocin, Eno and Sensodyne,” he said. “The final amount of net proceeds received will only be determined once the shares in HUL to be received have been monetised and after hedging costs, taxes and other expenses have been settled.”

GSK’s global consumer nutrition business, which essentially comprises malt-based beverages, generated £550 million in 2017 and roughly 80% of the sales came from India. Horlicks is by far the market leader in the malt-based beverages segment in the country with 43% share followed by Mondelez International’s Bournvita, which has around 13% share.

Traditionally, this has been a strong segment and generations of Indians in urban areas have grown up drinking Horlicks. But growth has slowed down over the past few years in India as consumers increasingly shift to specialised products made by nutraceuticals companies such as Abbott and Danone.

This has prompted some to describe the deal as an ‘expensive acquisition’ for HUL. The deal size is over seven times the revenues of GSK Consumer Healthcare and about five times the value of the entire malted beverages category. A senior executive of a consumer goods company which had initially shown interest in Horlicks said the brand had good recall but it had the ‘senior citizen’ tag attached to it. “It does not resonate well with the young. Also, you can become a target for NGOs and activists because it is a sugary drink,” said this person.

In India, the packaged food and beverages market is heavily skewed toward biscuits, salty snacks and aerated drinks and is worth nearly Rs 75,000 crore in size. Healthier segments such as malted beverages, cornflakes and oats remain on the fringes.

HUL, however, is upbeat about the merger and growth prospects.

“In the medium term, we see that we will grow this business in double digits, and given the synergies on the cost side, there is potential to increase margins between 800 to 1000 basis points at 8% to 10%,” said Srinivas Phatak, chief financial officer at HUL.

Food for thought
Over the years, HUL has struggled in the packaged foods segment, especially in the low-margin business. The maker of Knorr soup and Lipton tea has been focusing on core packaged food and beverage brands with higher margins and exited tea plantations, oil, fats and biscuits businesses. It also moved out of the bread and bakery business under the Modern brand.

This year, HUL combined its food and refreshments business into a single division to increase agility. The merged business — including Knorr soup, Kissan jam, Bru coffee, Lipton tea and Magnum ice-cream — accounted for sales worth Rs 6,328 crore, or less than a fifth of HUL’s overall sales in FY18.

While HUL leads the market in segments such as soups, jams and tea, the size of these categories are significantly smaller than most mass segments in the foods space.

For Unilever, though, food is a core growing business and was the secondlargest category until last year. After Unilever merged it with the refreshments portfolio, the combined business accounts for 41% of sales and is headed by former Hindustan Unilever CEO Nitin Paranjpe.
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