Mumbai: An unrivalled all-stock offer is what it took Hindustan Unilever Ltd to stave off several suitors for GlaxoSmithKline Consumer Healthcare Ltd, home to iconic brands such as Horlicks and Boost. HUL, India’s largest consumer goods company, was the only bidder to offer an all-stock option to GSK, said four people directly aware of the behind-the-scenes talks between GSK and potential buyers, which included at least one fast-moving consumer goods (FMCG) multinational, company, a host of private equity (PE) firms and one of India’s largest homegrown FMCG companies.
“It was too hard to resist, given the formidable presence of HUL in India and the accompanying market capitalization of over ₹3.95 trillion,” said the first person cited above. “In comparison, the others were offering cash and, in some cases, a mix of cash and stock, but the shareholders felt that the future of the business is most secure with HUL.”
HUL’s rivals such as Nestle India Ltd, The Coca-Cola Co. and ITC Ltd were in the fray.
The merger with HUL values the total business of GSK Consumer Healthcare at ₹31,700 crore. Shareholders will receive 4.39 HUL shares for each GSK Consumer share held, according to the share swap ratio.
The issue of new HUL shares will lead to dilution of its parent Unilever Plc’s holding from 67.2% to 61.9%. The valuation is a premium of 5% on the 15-day weighted average stock price of GSK Consumer.
“Several bidders were offering cash offers simply because they did not have a merger option,” said the second person cited earlier, requesting anonymity. “This was particularly the case with financial investors such as PE firms and even some of the strategic players.”
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“A competing offer from Nestle, which is also a listed entity in India, would have meant GSK Consumer Healthcare ending up with a significantly large stake in Nestle India, which has a market capitalization of ₹1.03 trillion, given the wide difference in the market caps of Nestle and HUL,” this person said. “This was not a desirable situation, as exiting the stock in short to medium term by GSK shareholders could impact the valuation of the merged entity adversely.”
The third person, who was aware of the sale process, said HUL scored high on several factors the sellers were looking at. “There were three major criteria—valuation, certainty and ability to close the deal quickly and a distribution arrangement for the rest of the products that are not being sold. On all the three criteria HUL scored high,” the person said. “It was clear from the start that this was a asset for strategic investors only.”
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The company was “clear all along that the most logical structure for the India leg of the deal is the merger of GSK Consumer Healthcare with HUL,” said the third person, highlighting the factors that favoured HUL. “HUL, given its reach and distribution, is far better placed to grow the business, take costs out, increase reach and thus help GSK Consumer shareholders participate in value creation.”
The second person cited earlier said “a cash offer, from a funding perspective, would have been highly inefficient as one would need to bring in fresh money from outside, given an Indian entity cannot raise funding from banks to make a cash offer”.
“Given the constraints, it becomes very, very difficult to fund such a transaction, especially one with a size of ₹31,000 crore, which is a massive deal. You don’t see such massive cash funding in the Indian market,” this person said. “So, you would have to fund from outside India.”
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A cash offer from a foreign company would have also meant that their boards in overseas locations would have to be willing to bite the high valuations for Indian consumer companies.
“Typically when people run DCF (discounted cash flow valuation model), they do a five-year model and then they will apply a terminal growth rate. You will never reach the market price for an Indian company with this model because they have longer growth horizons,” the second person cited before said. “You can build a 20-year model and then the market price makes sense, but a board sitting in London or Geneva will find it very hard to make sense of that.”
The all-stock merger offer from HUL was part of the growing trend in the space of deal-making in the current macro environment, said experts, who believe that more such deals might be in the offing in large merger and acquisitions (M&As).
“The deal structure shows that all-stock mergers are emerging as the preferred route for high-value and high-multiple M&A transactions in India, given the fact that most buyers are unwilling to raise debt and leverage themselves more at a time when credit environment is tight and to also insulate them for mismatch in earning cycle, where payback periods would be very high,” said Mahesh Singhi, founder and managing director of transaction advisory firm Singhi Advisors.
