Deal with GSK Consumer Healthcare earnings accretive for Hindustan Unilever

Hindustan Unilever's (HUL's) merger with GlaxoSmithKline Consumer Healthcare (GSKCH) is not only attractive for the latter's shareholders, given the share swap, but also accretive for HUL in the medium term. For every share of GSKCH, shareholders of the company will get 4.39 shares of HUL. Not surprising then, stocks of both the companies gained around 4 per cent, each, on Monday.

The deal should help HUL expand its food and refreshment (F&R) segment, given the fact that GSKCH is a market leader in health food drinks (HFD), with products such as Horlicks and Boost.

Horlicks and Boost have market shares of 49.5 per cent 13.9 per cent, respectively, as of September 2018. On a quarterly basis, these market shares look muted because of inclusion of some products such as protein drinks, under this category, making the base larger than before. The company had actually been gaining market share, says an analyst at domestic broking house. 

On the basis of 2017-18 (FY18) numbers, with this deal (likely to be completed by December 2019), share of HUL's F&R segment in the overall revenue increases by over 1,000 bps to around 29 per cent. Also, profitability of the segment also expands by around 161 bps to 17.2 per cent. 

Given HUL's strong distribution network (three times more direct reach than GSKCH), vast experience in the consumer space and low penetration in the HFD category, HUL's management expects the business to grow at a double-digit rate in the medium term. Besides, the deal also includes GSKCH's contracts to sell its group companies' products such as Iodex. This will provide additional revenue to HUL. In FY18, GSKCH had earned around Rs2 billion (4.6 per cent of its total operating revenue) from such services.

The overall gains, including cost synergies on operational front such as administration, selling and distribution cost, among others, are likely to provide 800-1,000 basis point-benefit in terms of profitability, maintains HUL. With this, earnings per share of HUL, following the deal, should improve by more than 4-5 per cent, say analysts. Overall, the deal offers good opportunities for the long-term investors.