Why GSK took Unilever shares for Indian Horlicks deal

GlaxoSmithKline’s sale of the malted drink came at a high price but mostly in shares.

British pharmaceutical group GlaxoSmithKline secured the high price of £3.1 billion ($3.97 billion) for the sale of its Indian business, but the proceeds are mostly in shares rather than cash.

GlaxoSmithKline said on Monday that it would sell Horlicks and other consumer healthcare nutrition brands to Unilever as well as merge GSK Consumer Healthcare India with Unilever’s Indian unit, Hindustan Unilever.

The assets fetched a high valuation at auction partly due to the growth of India’s consumer goods market and fierce competition from bidders.

Hindustan Unilever said on a conference call with analysts that it expects the health food drinks market in India to grow at a 9% compound annual growth rate until 2022. It was worth $1.1 billion in 2017. 

Unilever had to fend off competition from other suitors such as Nestle, the world’s largest food company by revenues, Coca-Cola, a person familiar with the matter said.

The deal values GSK Consumer Healthcare India at Rs317 billion ($4.5 billion), which implies a price/earnings ratio of about 20 times.

As a result, the deal was inked at a higher valuation than Kraft Heinz achieved in October with the sale of its Indian brands, including the Complan drink, for about Rs45.95 billion ($650 million), the person said.

Unilever won because the Anglo-Dutch group offered a higher price. However, so little of the payment is in cash.

Unilever agreed to a share exchange ratio is 4.39 shares in Hindustan Unilever for every 1 share in GSK Consumer Healthcare. After the merger, GlaxoSmithKline will own a 5.7% stake in Hindustan Unilever.

There is no lock-up on the relatively liquid shares and Unilever does not have a call option on the stock, so a sale should not present a great challenge unless market conditions deteriorate substantially.

GlaxoSmithKline will then look to sell its stake in tranches after the transaction closes. It expects the deal to close by the end of 2019, subject to shareholders’ and regulators’ approvals.

Of the £3.1 billion, GlaxoSmithKline will only receive £566 million in cash. This lump sum is for its 82% stake in GlaxoSmithKline Bangladesh as well as its commercial operations and intellectual property rights in 20 other predominantly Asian markets.

So investors expecting GlaxoSmithKline to fund its $5.1 billion cash acquisition of Waltham, Massachusetts-headquartered Tesaro, also announced this week, with funds from India, will need to factor in the risk of a market upset.

Morgan Stanley and Greenhill are serving as financial advisors to GSK. Nova Dhruva Capital is also advising GSK. Slaughter and May is serving as legal counsel to GSK, with AZB & Partners serving as Indian counsel.

BofA Merrill Lynch is serving as financial advisor to Unilever. Baker McKenzie is serving as legal counsel to Unilever, with Cyril Amarchand Mangaldas serving as Indian counsel.

¬ Haymarket Media Limited. All rights reserved.
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