Stock Fundamentals

A healthy deal

Parvatha Vardhini C | Updated on December 09, 2018 Published on December 09, 2018

The HUL-GSK Consumer merger is beneficial for shareholders of both companies

The merger of Glaxo SmithKline Consumer (GSK Consumer) with Hindustan Unilever (HUL) is a good deal for shareholders of both entities. Following the buyout of GSK Consumer by HUL for ₹31,700 crore, shareholders of the former will get 4.39 shares of HUL for every share held in GSK Consumer. The deal comes at a time when FMCG stocks have rallied over the last two years, thanks to the revival in demand, after the demonetisation and GST changeover.

Besides, the market volatility this year has also led to investors taking to FMCG stocks as a defensive bet. GSK Consumer shares have moved up by 50 per cent over the last two years, while HUL shares have more than doubled.

In this backdrop, GSK Consumer shareholders can take comfort in the fact that HUL is paying almost the market price of the shares as on date of announcement to acquire the company. The deal is valued at around 7.5 times GSK Consumer’s revenue of ₹4,300 crore for 2017 -18. In comparison, the recent acquisition of Heinz brands such as Complan , Glucon-D, Nycil and Sampriti by Zydus Wellness (which, however, are much smaller than GSK’s flagship Horlicks) was valued at four times the revenues of these brands.

 

 

Once the approvals (expected in a year) are got, shareholders of GSK Consumer, as on the record date, will be allotted HUL shares. With a diversified product portfolio across home care, personal care and foods, and market leadership in several categories, HUL is a probably a must-have bluechip stock for the long-term in any portfolio. Its wide reach as well as differentiated products across price points are a big positive. Expansion of product line from time to time to include premium products as well as the company’s pricing power to pass on any cost increases, constantly drive improvement in realisations and margins for the company.

EPS-accretive for HUL

Although HUL has perhaps paid top dollar for GSK Consumer, HUL investors can take comfort in the fact that the acquisition will be immediately EPS-accretive, despite the equity dilution from the share swap. Taking Bloomberg consensus earnings estimates for 2019-20 for both the companies, the EPS of the merged entity is expected to come in at ₹34.96.

Despite the equity dilution to the extent of 8 per cent at HUL following the merger, this expected EPS post-merger is higher than the ₹33.34 expected for HUL alone, without considering the merger.

Thus, the buyout is EPS-accretive, even without considering the synergies such as shared distribution network. Both companies enjoy overall operating margins of 18-20 per cent now. Synergies could further drive margins up. The GSK Consumer brands will give HUL a foot hold in a category it is not currently present in.

But even as GSK Consumer boasts of good volume growth of 8-16 per cent in recent quarters, the concern is that the growth in the health drinks industry (in which Horlicks is the market leader) is slowing.

 

 

The heath food drinks category has seen only 6 per cent growth annually in 2014-17, a slowdown from the 16 per cent annual growth in 2009-14, going by reports from several market research agencies. HUL, however, can turn the tide in its favour by improving the reach of GSK’s products, as it has three times wider reach than GSK Consumer’s.

The all-India penetration for drinks such as Horlicks is still only 24 per cent, with rural penetration being lower at 14 per cent. HUL also plans to leverage on the growing demand for premium health drinks through products such as Horlicks Cardia Plus or Horlicks Protein Plus.

Following the acquisition of GSK Consumer by Hindustan Unilever, shareholders of the former will get 4.39 shares of HUL for every share held.

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