Event update: Hindustan Unilever (Outperformer) - GSK Consumer acquisition: A big ‘Boost’ to HUL’s Food and Refreshment portfolio
Event
The Hindustan Unilever (HUL) board has approved a scheme of amalgamation between the company and GSK Consumer Healthcare (GSKCH) India subject to requisite approvals from statutory authorities/shareholders.
Key details
- Transaction details – a) The transaction is an all equity merger with 4.39 shares of HUL being allotted for every share in GSKCH India. b) the Horlicks brand in India and International markets (Bangladesh and 20 other markets) currently owned by GSK Plc is being acquired by Unilever Plc. Brands owned by GSKCH India (Boost, Viva and Maltova) will be retained by merged entity. Further, the merged entity will continue to distribute GSK’s OTC & oral health products under a consignment selling agreement (5years).
- Deal Size - The transaction values the GSKCH India business at equity value of Rs317bn (~32xFY18 EBITDA/6.5x FY18 sales). As of FY18, the GSKCH India business sales/EBITDA stood at Rs43bn/Rs8.8bn, equivalent to 12.5%/12% of HUL’s FY18 sales/EBITDA. Management expects deal to be completed in next 1 year.
- Significant synergy benefits – Management highlighted HUL can unlock synergies by accelerating revenue growth and driving cost efficiencies. It expects to drive double digit revenue growth and expects full synergy benefits of 800-1000bps to GSK’s margins over the medium term.
Our view
We are currently assuming a 500bp synergy benefit in FY21 (first year of complete consolidation) which amounts to a 6.2% EPS accretion. A faster transmission of synergies could result in a positive earnings surprise in FY21E. We view this acquisition as extremely positive for HUL as it gives the company scale in the food and refreshment category and can be leveraged to tap adjacent categories as well. Further, we believe the business is being acquired at a time when it is on an upswing. We now value HUL based on our FY21 estimates for the combined entity, giving it a 46x PE multiple based on a 20% premium to the FMCG sector average. Maintain Outperformer.
Hindustan Unilever is predominantly engaged in manufacturing and distributing consumer products mainly in India. Co. operates five main business segments: Soaps and Detergents include soaps, detergent bars, detergent powders, detergent liquids, scourers, etc.; Personal Products include products in the categories of Oral Care, Skin Care (excluding soaps), Hair Care, Deodorants,Talcum Powder, Colour Cosmetics, Ayush services; Beverages include tea and coffee; Package Foods include Branded Staples (Atta, Salt, Bread, etc.), Culinary Products (tomato based products, fruit based products, soups, etc.) and Frozen desserts; Others include Exports, Chemicals, Water business, Infant Care Products.
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