HUL-GSK Consumer deal is a win-win for shareholders, say analysts

Shares of Hindustan Unilever (HUL) and GSK Consumer Healthcare climbed 4.7 per cent to Rs 1,836 levels and 4.1 per cent to Rs 7,565 levels respectively, after their respective boards approved their merger, subject to obtaining requisite approvals from statutory authorities and shareholders.

Unilever on Monday confirmed it was acquiring Horlicks and other health food products in an all-equity merger of Hindustan Unilever Ltd (HUL) with publicly listed GSK Consumer Healthcare India.
 

The merger of HUL with GSK Consumer Health will be on the basis of an exchange ratio of 4.39 HUL shares for each GSK Consumer Health share. The deal also includes the acquisition of certain other commercial operations and assets outside of India.

The deal, which is expected to be completed in 12 months, will see the HUL’s turnover of foods & refreshments business exceed Rs 100 billion.

“Following the issue of new HUL shares, Unilever‘s holding in HUL will be diluted from 67.2 per cent to 61.9 per cent,” HUL said in a regulatory filing.

The Foods & Refreshment business of the company caters to products like Tea & Coffee (Lipton, Bru, Red Label, Taj), Cold Beverages, Ice Creams (Cornetto, Kwality Wall’s, Magnum), Jams (Kissan), Ketchup (Kissan), Salts and Atta(Annapurna).

In terms of profitability, the Beauty & Personal Care segment continues to be largest segment in terms of contribution to revenues as well as in terms of margins. The EBIT margins for this segment stood at 26% in the Sep’18 quarter. This is on the back of greater premiumisation witnessed in the segment as compared to the other segments.

A smart move
 

Analysts have given a thumbs-up to the deal, which they believe is a win-win situation for both the companies – both globally and in the Indian markets. While GSK had already put Horlicks on the block since quite some time, HUL’s acquisition of GSK’s products (including Horlicks) will strengthen the latter’s position – both in terms of product offerings and the geographical spread – in India, they said.

“It is a win-win situation for investors in both the companies. There is nothing to worry. That said, there can be some hiccups or teething troubles as regards the merger, but that’s a given as most mergers do go through some troubles initially before they get ironed out,” said Arun Kejriwal, founder, Kejriwal Research and Investment Services. 

Thus far in calendar year 2018 (CY18), HUL has outperformed the Nifty FMCG index by rallying 28 per cent (till November 30), ACE Equity data shows. By comparison, GSK Consumer and the Nifty FMCG index have rallied 12 per cent and 11 per cent, respectively.

Sudip Bandyopadhyay, Group Chairman at Inditrade Capital, says with GSK Consumer, HUL gets a well-entrenched, decade-old brand with an excellent brand recall. The distribution network should be in a position to significantly increase GSK's business and thus help HUL achieve the goal of being a category leader in few segments of the food business.  
 

Ambareesh Baliga, an independent market analyst agrees. “It is an excellent deal for HUL, which is adding around 50 per cent to its networth and 33 per cent to its assets by diluting 8 per cent of equity. This is the power of enjoying rich valuations. It seems the deal is more positive for HUL shareholders, but GSK shareholders will also stand to gain in the long run,” he adds.

"We initiate coverage on HUL with a buy rating and a target price of Rs 2,250 per share," wrote Narendra Solanki of Anand Rathi in a post deal report.