Unilever acquires GSK India, the owner of Horlicks and Boost

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New Delhi, December 07, 2018: Unilever is buying most of GlaxoSmithKline’s (GSK) Indian consumer healthcare business, including its popular malted milk drinks Horlicks and Boost, for 3.3 billion euros (Rs 317 billion) to boost its footprint in one of the world’s fastest-growing major economies.

The deal, announced on Monday, will see Unilever and GSK merge their Indian businesses. Once the deal is closed, GSK will hold a 5.7% stake in Hindustan Unilever (HUL).

The transaction strengthens Unilever’s presence in the emerging markets that account for about two-thirds of its revenue. The Dove soap maker will make use of cash and shares from its Indian subsidiary to take control of a new venture, which includes Glaxo’s listed entity in the country.

The acquisition is in line with the Unilever’s strategy to build a sustainable and profitable foods and refreshment business in India, by making full use of the health and wellness trend.

“If you look at Unilever’s foods portfolio in India, they have been seriously lagging for many years now, especially versus the global Unilever portfolio,” Anand Shah, an analyst at Axis Capital Ltd, Mumbai, told Bloomberg. “It’s a bid to expand the entire food pie for themselves.”

Commenting on the development, Sanjiv Mehta, HUL’s Chairman and Managing Director said in a statement: “With this proposed strategic merger with GSK CH (GSK Consumer Health) India, we will be expanding our portfolio with great brands into a new category catering to the nutritional needs of our consumers.”

After the acquisition is completed, Mehta said the turnover of the company’s Foods and Refreshment (F&R) business will exceed Rs 10,000 crore. “We will become one of the largest F&R businesses in the country,” Mehta said in the statement according to qrius.com.

How did the deal come about?

To help fund its $ 13 billion buyout of Novartis’s stake in their consumer healthcare joint venture, GSK was looking at a partial or full sale of its stake in Indian subsidiary GSK Consumer Healthcare by the yearend.
A number of HUL’s rivals, such as Nestlé India Ltd., Coca-Cola Co., and ITC Ltd., had expressed interest, but Unilever finally edged past Nestlé in a competitive auction.

An unrivalled all-stock offer is what saw HUL clinch the deal with GSK. HUL, India’s largest consumer goods company, was the only bidder to offer an all-stock option to GSK, four people familiar with behind-the-scenes talks between GSK and potential buyers, told Live Mint. Potential buyers also included host of private equity (PE) firms.

“It was too hard to resist, given the formidable presence of HUL in India and the accompanying market capitalization of over ₹3.95 trillion,” said one of the people familiar with the deal.

“In comparison, the others were offering cash and, in some cases, a mix of cash and stock, but the shareholders felt that the future of the business is most secure with HUL,” the person added.

Terms of the merger

The merger of GSK CH (GSK Consumer Health) India with HUL will be on a basis of an exchange ratio of 4.39 HUL shares for each GSK CH India share, implying a total equity value of Rs 317 billion for 100% of GSK CH India. Following the issue of new HUL shares, Unilever‘s holding in HUL will be diluted from 67.2% to 61.9%.

In the deal, HUL will acquire Horlicks and Boost from GSK. In addition, HUL will also buy GSK’s business in Bangladesh as well as nutrition brand rights for “certain other territories” at a price tag of 566 million euros.

The entire transaction is expected to be completed in one year, subject to regulatory and shareholder approvals.

HUL’s recent acquisitions

In the recent past, HUL made a number of acquisitions to diversify its offerings. In August 2018, it acquired the ice cream and frozen desserts business of Karnataka-based Vijaykant Dairy and Food Products Ltd.

Earlier, at the start of 2016, HUL bought Kerala-based Mosons Group’s Indulekha and Vayodha hair care brands for Rs 330 crore. HUL is also known to have made a significant consumer-facing asset acquisition in the form of Modern bakery business back in 2006. However, it sold this unit to Everstone, a private equity firm, in 2015.

How will the deal benefit HUL and its shareholders?

The market responded positively on Tuesday as news of the deal broke. After the merger was announced, HUL shares jumped 4.12% to close at Rs 1,825.90 on the BSE. GSK CH shares rose 3.75% to close at Rs 7,542.85 apiece, translating into a market cap of Rs 31,721 crore.

Earnings at HUL’s local unit for FY18 have been estimated to increase 13%, while equity dilution after the merger would be 8.5%. This means that earnings per share (EPS) at HUL should jump more than 4% immediately.

Unilever CEO to retire

On November 29, Unilever said in a statement that CEO Paul Polman will be retiring from the company. Polman will be replaced by Alan Jope, who is currently President of the Beauty & Personal Care division. Jope will assume his position from January 1, 2019, with Polman supporting the transition process during the first half of the year.

Polman had been Unilever CEO for over 10 years and has worked in the consumer goods industry for almost four decades. During his tenure, the company delivered consistent top and bottom line growth ahead of its markets, Unilever said.

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