When it comes to mergers and acquisitions using share swaps, there can always be a slip between the cup and the lip. For instance, a deal can be struck assuming the acquirer’s shares will trade at a certain value. But, many months later, when the deal concludes, investors will discover whether the assumption still holds.
In December 2018, when Hindustan Unilever Ltd (HUL) announced the acquisition of GlaxoSmithKline Consumer Healthcare Ltd (GSK Consumer), the former’s shares were around ₹1,717 each. But only in May 2020 did GSK Consumer’s parent company GlaxoSmithKline Plc (GSK) sell the HUL shares it had received as compensation.
The good news is that the share sale was concluded at ₹1,905 per share. A depreciation in the rupee against the British pound, however, ate up about half of those gains, leaving GSK with just about 5% higher realization compared to what it had anticipated in end-2018.
Considering all the flux since covid-19, GSK will consider itself fortunate that its proceeds from the GSK Consumer’s sale in India have remained virus-proof. Besides, concluding a block deal as high as ₹25,000 crore in a volatile market such as the current one was no mean feat either.
For GSK Consumer’s minority shareholders in India, the deal has worked out far better. Trading data shows that most of them sold their shares in mid-April, as soon as they were allowed to, and HUL’s shares traded between ₹2,450 and ₹2,500 at the time, implying returns of 44% compared to the valuations in end-2018.
As it turns out, HUL shares peaked at about ₹2,500 and have fallen by 20% since. The sale by minority shareholders was timed to perfection.
Note that GSK Consumer had been valued at 6.9 times sales when the deal was struck, far higher than the valuation of four times sales Heinz India Pvt. Ltd received when it sold Complan and three other brands a month earlier.
Of course, it has worked out as a win-win for HUL as well, since the company used its highly expensive shares as currency for the deal.
HUL shares traded at about 55 times earnings at the time. The deal also helped it to increase the share of food and beverages in its product portfolio to about 28% of revenues, from 18% earlier.
Some analysts say HUL’s superior distribution network will result in better growth prospects for the newly acquired portfolio. It also helps that GSK Consumer’s profit margins were ahead of profit margins at HUL’s food and beverages business.
And, in a post-covid scenario, the acquisition of GSK Consumer’s Horlicks brand may work out better than expected, going by the initial assessment that demand for health-related products is expected to rise.
