There were many players involved in the race to acquire GSK, some were private equity players. Even Nestle was one of the front runners in the acquisitions race. But GSK thought the all-share deal with HUL will be beneficial.

It was an all-share acquisition. No money was paid. There will be direct share swap. GSK investors will get HUL shares. No need to take loans and create debt. Both the companies are virtually debt free and they are going to continue enjoying this.

First lets the compare the two companies on certain parameters

HUL

GSK

Rs. 3,91,000 croresMarket Cap (as on 5th December 2018)Rs. 31,700 crores
Rs. 36,408 croresTrailing Twelve Months (TTM) SalesRs. 4,600 crores
Rs. 5,700 croresTrailing Twelve Months Net ProfitRs. 851 crores
66.84P/E Ratio37.05

Summary: –

  • The market cap of HUL is almost 12 to 13 times that of GSK.
  • A significant difference can be noticed in the TTM Sales (revenue) as well of both the companies.
  • There is a noticeable difference in the Net profits (PAT) too of these companies.
  • According to the P/E ratio, the investors are giving less price to GSK as compared to HUL.

Now, let’s understand the P/E ratios of these companies: –

HUL

GSK

109%Return On Capital Employed32.53%
77.57%Return On Equity21.18%

Summary: –

  • ROCE
    • A company which has higher ROCE get higher valuations in the market. Thus, because of high ROCE of HUL it has high P/E ratio.
    • The vast difference between the companies’ ROCE is the reason behind the difference in their P/E ratios.
  • ROE
    • The huge difference in the ROE of both the companies too causes the difference in their P/E ratios

Share Details

After the acquisitions, every 1 share of GSK will attract 4.39 share of HUL. For example, if you have 100 shares of GSK, then you will get 439 shares of HUL.

Acquisitions Benefits to the Foods & Refreshment Business

Foods & Refreshment Business is worth Rs. 6,500 crores. Total sales of HUL is of Rs. 36,000 crores. Thus, 18% of the revenue of HUL comes from foods & refreshment business.

It should be noted that it is in this business sector only that all the products of GSK are going to be added up. So, if we add Rs, 4,600 crores of GSK, then the foods & refreshment business amounts to almost Rs. 11,000 crores.

Distribution Network Benefits

HUL currently reaches to 80 lakh outlets with a predicted number of 1 crore outlets in the next year. For GSK, Horlicks, their main product, alone has reach of around 25 lakh outlets.

Therefore, after the acquisition, HUL will experience double digit growths in their distribution network. The synergies of the companies will yield better reach.

Double digit growth, greater outreach, better synergies, increase in margins as both have same operating profit at 22% will be advantageous to HUL in every way. This will also lead to increase in HUL’s share price.

Products Acquired by HUL

  • By Indian entity of HUL
    • Boost
    • Maltova
    • Viva
  • By Unilever, parent company of HUL
    • Horlicks

Unilever acquired Horlicks because it plans on selling Horlicks globally. As a result, HUL will pay a certain royalty to Unilever on sale of Horlicks in India. (the royalty amount has not yet been disclosed)

Ownership Details

Previously, Unilever’s ownership in HUL was 67.2%. Post-acquisition, this ownership of Unilever in HUL will become 61.9%. This decreased ownership of 5.3% has gone to the investors of GSK.

All in all, this is a win-win deal for both the companies.