HUL-GSK deal proves the power of equity, role of premium valuations

The much-awaited announcement of sale of Horlicks brands finally turned out to be a complete buy-out of the GSK Consumer Healthcare in a share swap deal by Hindustan Unilever (HUL) pipping among others, Nestle, which was thought to the closest suitor till a few days ago.  The first big positive is that it’s a share swap deal where-in 4.39 equity shares of HUL would be swapped for every equity share of GSK Consumer. It seems a win-win for both the shareholders, but more so for HUL as a company.

In addition to iconic Horlicks brand for Indian as well as international markets, HUL would also own other brands such as Boost, Viva and Maltova (the last two were bought from Jagatjit Industries by GSK Consumer in 2000) giving it an edge across various sub-markets. Horlicks is the market leader in the malt-based health beverages segment with a 43 per cent market share. This would be a first major entry of HUL in nutritional food, complimenting an existing array of convenience packaged foods as well as beverages. GSK Consumer also brings along the niche distribution network which combined with HUL’s gigantic network should provide a further boost to the hereto weaker markets of GSK.  There is also a five-year agreement of consignment selling of GSK’s OTC and oral health products, which will be network accretive for HUL’s products.

India is the world’s largest malt-based health beverages market. However, it’s been stagnating since the last few years and this clearly stands out in the flat top-line of GSK Consumer over the last few years though margins held up. There has been a slow but distinct shift to other health supplements as well as nutraceuticals. It’s now expected that with HUL backing, the brands would get a further fillip and going ahead there could be other brand extensions.

This transaction proves the power of equity and the role of premium valuations the acquiring company enjoys. HUL would be adding 50 per cent to its networth, 33 per cent to its assets and 12 per cent to the top-line through this acquisition by diluting just about 8 per cent of the equity. This acquisition is margin accretive, thus should add value to the combined entity. A cash buy out, on the other hand, would be have been tax inefficient and GSK shareholders would not have got the net value they are now deriving out of this deal.

Going ahead, we could see more such consolidation in the FMCG space as larger players with a more efficient and effective distribution network along with the equity advantage, would gobble up smaller yet relevant brands to improve the retail shelf share.

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The author is an independent market analyst. Views expressed are his own