ET Intelligence Group: The Hindustan Unilever-GSK Consumer Healthcare merger, which follows the Unilevers acquisition of GlaxoSmithKline Plcs nutrition business, would immediately boost earnings at Indias biggest consumer company as expansion in the equity base trails the proportional increase in combined net profits.
For HUL, the merger is earnings accretive from the start. Earnings at the local unit of the Anglo-Dutch consumer major for FY18 are estimated to increase 13 per cent, while equity dilution after the merger would be 8.5 per cent. So, earnings per share (EPS) at HUL should jump more than 4 per cent immediately, back-of-the-envelope calculations showed. The existing investors in GSK should also benefit from the deal.
In the long term, benefits from synergy extraction are estimated to be even bigger — and more durable — for HUL, which is seeking to establish its leadership credentials in the Indian packaged foods business. Given that the merger would take about 12 months to conclude, analysts are looking at FY21 earnings to evaluate the deal.
At estimated FY21 earnings of Rs 8,500 crore, HUL shares are trading at 46 times. GSK, at Rs 31,700 crore, is valued at 31.7 times estimated FY21 earnings of Rs 1,000 crore. With HUL buying GSK Consumer, analysts expect the acquired business to be re-rated over a period.
As cost synergies kick in and HUL leverages its robust distribution and marketing network across the country to re-energise the trusted nutrition brand Horlicks, the acquired businesses should bring in higher profits than the Rs 1,000 crore analysts have penciled in for FY21. Industry trackers believe that HUL would allocate more resources to strengthen the brands that could become the mainstay of its foods business.
HUL has invested almost Rs 3,000 crore in the foods business over the last 10 years, more than in any other revenue-category. Earnings from this business more than doubled in the last five years, but they still make up about 15 per cent of the total earnings.
To be sure, analysts would seek to assess the impact of royalty payments on the Indian unit as Unilever Plc, the parent company of HUL, gets to retain the rights for Horlicks and the other acquired brands.