Hindustan Unilever, the largest fast moving consumer goods maker in India, has agreed to merge the India consumer healthcare business of pharma giant GlaxoSmithKline in an all equity deal. It will be among the largest deal in the FMCG market.
As a part of the agreement, HUL, which makes the Surf detergent, Lux soap and Red Label tea, will merge GlaxoSmithKline Consumer Healthcare, giving it access to health food brands like Boost, Viva and Maltova. The iconic malted milk drink brand Horlicks, which is currently owned by GSK Plc, is also being acquired by HUL's Anglo-Dutch parent Unilever.
Additionally, HUL will also distribute GSK's over-the-counter (OTC) and oral health products under a consignment selling agreement for five years.
The deal values the total business at Rs 317 billion and the share swap ratio has been set at 4.39 HUL shares for every one share held in GSK Consumer India. GSK and its group companies will hold 5.7 per cent in the merged entity, while Unilever's shareholding will stand at 61.9 per cent.
On Monday, HUL shares closed up 4.1 per cent at Rs 1,825.90 and GSK Consumer rose 3.8 per cent to Rs 7,542.85. GSK Pharma was up 2.2 per cent to Rs 1,384.20.
“Horlicks has made a significant contribution to GSK and to the health of consumers across India for many decades and we believe Unilever is well placed to maximise its future potential,” said Emma Walmsley, CEO, GSK.
Apart from selling the consumer healthcare business in India, GSK is also selling 82 per cent stake in its unit in Bangladesh and brand rights for GSK's consumer healthcare nutrition activities in few other markets to Unilever separately, for 566 million GBP in cash.
For GSK, selling the malt-based drinks business will help it increase investments and focus in core pharmaceuticals. Earlier this year, GSK bought out rival Novartis out of their consumer healthcare joint venture.
“Proceeds from this transaction (with HUL) will be used to support the group's strategic priorities, including investing in our pharmaceutical business,” Walmsley said.
Unilever says this deal helps it leverage on the “mega trend of health and wellness.”
Malt drinks like Horlicks and Boost have been extremely popular in India as a nutritional supplement for growing kids.
It is estimated that the malt-based drinks category will grow to Rs 119 billion by calendar year 2022, from Rs 77 billion, last year.
HUL says strong structural drivers like a large young population, rising affluence and disposable incomes and growing nutritional needs will drive the category growth. Furthermore, the overall penetration of malt-based drinks is only around 24 per cent. HUL, through its significantly larger distribution network of over 7 million outlets, could further drive penetration, it said.
GSK has said that India remains an important market for the company, where it will continue to invest in and grow its OTC and oral healthcare brands like Crocin, Eno antacid and Sensodyne toothpaste. This business of GSK will also get a boost from the five-year consignment selling agreement with HUL; the later's distribution reach could drive more sales.
The deal comes at a time, consumer goods makers are seeing strong growth. HUL's volumes (total units sold) rose 10 per cent in the July-September quarter and the outlook for the sector remains strong.
“With most of macro, fiscal disruptions over and FMCG market showing early signs of growth we expect tailwinds like upcoming elections, lower commodity prices, favourable exchange rates, higher MSP (minimum support prices on agricultural produce) to add to the volume growth as well as value growth for the companies,” said Narendra Solanki, analyst at broker Anand Rathi.
HUL is expecting the GSK deal to be completed in one year. Upon completion, it could tentatively add Rs 4 to HUL's earnings per share, feels Solanki.
