Is Acquisition Of Horlicks, Boost At A Premium Over Complan’s?

Zydus Wellness announced it would acquire the key brands of Heinz India Ltd.—including the nutrition drink Complan.

(Photo: Bryn Colton/Bloomberg)  

Jars of Horlicks, the light malted milk drink produced by GlaxoSmithKline Plc. 

Hindustan Unilever Ltd.’s acquisition of Glaxo Smithkline Plc’s India consumer business has come at a premium compared with the takeover of Heinz India’s key brands by Zydus Wellness Ltd.

Zydus Wellness recently announced that it would acquire the key brands of Heinz India Ltd.—including the malt-based nutrition drink Complan and energy drink Glucon-D—for $628 million. This was followed by Hindustan Unilever Ltd.’s deal to buy the Indian consumer business of GlaxoSmithkline Plc for nearly $3.8 billion.

Why HUL’s Acquisition Is At A Premium

Glaxo Smithkline’s company filings indicate a compounded annual revenue growth rate of 2 percent in the last two fiscals. The revenues of the four brands acquired by Zydus Wellness, in contrast, contracted by nearly 3 percent during the period. Both the target businesses posted operating profit of 20 percent in the year ended March 2018.

(Photo: Bloomberg Quint)

Earnings Per Share Impact

A Spark Capital research report on the Zydus Wellness–Heinz India deal said that “the transaction is expected to be earnings per share accretive in the long run but based on our rough calculations it will be EPS dilutive for now”.

The report projects Zydus Wellness’ earnings per share for the year ended March 2020 at Rs 40 before the merger and at Rs 30 after Heinz India’s brands are taken into its fold.

However, the acquisition of GlaxoSmithKline Plc’s brands is expected to be EPS accretive on merger completion. CLSA said in a report that “based on our forecast, and assuming no synergy the deal would add around 6 percent to HUL’s EPS”. A Bloomberg consensus of analyst estimates puts Hindustan Unilever’s EPS for the year ending March 2020 at 33.6.

Market Share Of Malt-Based Drinks

Horlicks is the leader in India’s nutrition drink market with 50 percent share followed by Boost’s 14 percent, according to the company’s November 2018 analyst presentation. New reports peg Complan’s market share at between 8 to 10 percent.

Deal Size-To-Turnover Ratio

The value of Hindustan Unilever’s acquisition was Rs 31,700 crore, according to a company statement, and GSK Consumer Healthcare Ltd.’s revenue for the year ended March 2018 was Rs 4,316 crore—leading to a deal size-to-turnover ratio of 7.4.

Heinz India’s assets were bought for a cash consideration of Rs 4,595 crore and the company indicated a turnover of Rs 1,150 crore for the 12 months through June 2018. The deal size-to-turnover ratio of 4 is at a discount compared with Hindustan Unilever’s buyout.

(This story has been published in an arrangement with Bloomberg Quint.)