How GSK boosts HUL in an all equity merger :

case analysis
By Diganth Raj Sehgal - March 9, 2021

Image Source: https://bit.ly/3v6LnyJ

This article is written by Utkarsh Sharma who is pursuing a Diploma in M&A, Institutional
Finance and Investment Laws (PE and VC transactions) from LawSikho.

Table of Contents 
1. Introduction
2. About HUL and GSK India
2.1. Hindustan Unilever Limited (HUL)
2.2. GlaxoSmithKline Consumer Healthcare Limited (GSK India)
3. Understanding the deal structure between GSK and HUL
4. Analysis of the Deal
4.1. Business Strategy of HUL
4.2. Business Strategy of GSK
4.3. Deal Structure: Equity against Cash 
4.4. How was the deal structured to save on taxes?
5. Effect on business growth, market reach, production and customers
5.1. Aftermath of COVID-19 for HUL
6. References

Introduction
In December, 2018, GlaxoSmithKline Consumer Healthcare Limited (GSK India) decided
to merge with Hindustan Unilever Limited (HUL) and the equity merger deal was
concluded in April, 2020. Such a decision came about after GlaxoSmithKline (GSK), the
parent company of GSK India, decided to divest GSK India and sell its business to the
existing Indian companies. Companies such as Nestle, HUL and Coca-Cola made bids for
acquiring GSK India and eventually the proposal of HUL was welcomed by GSK.

This decision of amalgamation by HUL was followed by a significant rise in the base
points (BPS) of shares of HUL and also net profits of HUL considering the adverse effect
on production and consumption level of products during COVID pandemic. Hence, in this
article, we shall analyse the merger between HUL and GSK and ascertain the strategic
reasons based on which the companies adopted this merger deal.

About HUL and GSK India

Hindustan Unilever Limited (HUL)

HUL is the Indian subsidiary of Unilever Plc based in the United Kingdom. Unilever holds
67.2% stake in HUL which is currently listed on BSE and NSE. HUL being a company
running for more than 80 years is popularly known for its production, marketing,
distribution and selling of various products and large customer base. HUL is engaged in
the business of fast-moving consumer goods and some of the famous brands include
Lux, Lifebuoy, Surf Excel, Bue, Brook Bond, etc. HUL is mainly engaged into four types of
commodities, i.e. personal care products, home care products, food and refreshments
and home purifier. 

GlaxoSmithKline Consumer Healthcare Limited (GSK

India)
GSK India is a sister company of GSK established in London, United Kingdom. GSK India
has been known for its popular energy drinks like Horlicks and Boost which occupy more
than 40% of the energy milk powder market. Other popular brands of GSK are
Sensodyne, Eno, Otrivin and Crocin. Prior to the merger, GSK held 72.5% of stake in
GSK India.

Understanding the deal structure between GSK

and HUL
After considering multiple bids from various companies like Coca-cola, Nestle and
Unilever, GSK decided to merge its Indian subsidiary with HUL for a total consideration of
Rs. 42,242 Cr. approximately which was equity-based. Hence, the consideration was in
the form of equity shares of HUL and no cash transaction was involved. The share swap
ratio was 4.39:1 i.e. 4.39 shares of HUL for every single share of GSK India. This
decision was made based on the valuation of shares prevailing in September, 2018. The
merger decreased the HUL’s promoters holding by 5.28% in HUL and concurrently
increased the shareholding of GSK to 5.7% under the public shareholding category.

The arrangement also included a Consignment Service Agreement which stated that GSK
along with the equity shares of HUL would distribute its over-the-counter drugs (OTC) or
non-prescription drugs and oral healthcare products (OH) through the channels of HUL.
Such an arrangement would last for a period of five years and is also subject to renewal
by mutual consent. Parties also entered into an IT Transition Services Agreement for a
period of 12 months.
Analysis of the Deal

Business Strategy of HUL

The decision of HUL to buy the business of GSK India would easily give rise to the
assumptions that the company is focusing on strengthening its market in the food and
refreshment segment. After occupying products like Horlicks and Boost, the profit margin
would immediately rise. An indication could be the share price of HUL as there was a
push in the share prices in December, 2018 when HUL announced the absorption of GSK
India and also in April, 2020 when the deal was closed. 

The large supply chain already in the hands of HUL would immensely help in injecting
the acquired products in areas where these products were less or not consumed at all. In
June, 2020, the company had also proposed to improve their market reach to rural areas
as well.

In exchange for the business of GSK India, HUL not only acquired successful trademarks
of GSK India but also its production units and distribution channels. Money in the name
of Goodwill was also paid to GSK in return. For the arrangement of OTC/OH with GSK,
HUL would provide their distribution channels and would also keep their margins making
it a win-win situation for the both entities. Hence, brands such as Crocin, Sensodyne,
Eno, etc. are not transferred to HUL and GSK would be responsible for demand
generation, portfolio strategy, R&D and marketing for these brands. Export of GSK India
products would be handled by Unilever India Exports Limited (UIEL), a subsidiary of
HUL. 

Business Strategy of GSK

Following their business strategy, GSK decided to divest GSK India’s energy drink
products to obtain capital in return. Even after the conclusion of the merger, GSK clearly
stated their intention to sell the acquired equity stake of HUL as and when they feel
appropriate and when the market conditions are favourable. Such proceeds would be
further utilized for reducing debt and for other strategic requirements of the company. A
combination of divestment was made by GSK in India, Bangladesh and other territories
against which the company will receive a total consideration of £3.1 Billion
approximately. 
Deal Structure: Equity against Cash 
In case, cash is decided as a consideration for buying a divested business, raising money
for executing such a large-scale transaction would meet with multiple hurdles. Any
company would not have such a large cash reserve for the purpose of payment of
acquisition expenses this big. Cash transactions are also taxable in the hands of the
promoters of the target company. Hence, opting for share exchange is beneficial for both
the parties from the point of view of arranging transaction consideration and for taxation
as well.

How was the deal structured to save on taxes?

This transaction was a tax neutral transaction as there is an exchange of shares among
the parties of Indian region as per section 47(vii) of the Income Tax Act, 1961. The
shares of HUL being transferred to the promoters of the GSK would be taxed at the
instance they are sold by them in exchange of cash or money consideration in future.
Even the payment made in the name of Goodwill was not taxable during the transaction.

Effect on business growth, market reach,

production and customers
The stock prices at the beginning of April, 2020 for both GSK and HUL were all-time high
giving a 5% rise. Net profit earned by HUL’s in the last financial quarter of 2020 was
19% higher as compared to the last quarter of 2019. While the overall growth of the
FMCG industry stood at 5 %, the total sales of the company grew by 20% (Domestic
sales growth being 7%). Sales and profit margin of Food and Refreshment category,
which also contains Heath Food drinks, rose to 19% and 14%.

HUL by June quarter saw a rise of 5% in market share and 24% growth in net profits i.e.
profit after tax. HUL further projects a rise in net profits by more than 20% margin and
rise in 500-700 BPS by next 4-5 years.  

A variety of products offered through Horlicks brand significantly helped the company in
growing their Health Food Drinks (HFD) proceeds. The company in their investor
presentation has also mentioned that the company would be focusing more on
expanding their product availability in the rural areas. The company plans to utilise their
channels and increase their rural area market for milk energy drink. The acquisition has
made the company stand in front almost every sector of the FMCG industry. Products of
HUL for skin cleansing, skincare, tea, household care, health food drinks, hair care and
ketchup are foremost in the competition and customer preference. 

Aftermath of COVID-19 for HUL

Lifebuoy of HUL was recently met with huge demand due to the global pandemic and
large-scale requirement of hand wash and sanitizers. The company also promoted
Domex disinfectant. The company also offered a 15% reduction in the prices of essential
commodities. The company has thus made every extreme effort in marketing their
products while various other companies struggle to sustain their business. 
This in turn improves consumer trust and builds confidence in the shareholders as well.
Even during the period of economic downfall and financial crunch in almost every sector,
the company has managed to increase its profit margin by 19% in the last quarter of
2020 as compared to the last quarter of 2019. Yet, the company has not performed well
with brands like Kwality Walls, Cornetto, water purifier, etc. due to a sudden halt in the
demand for these products. 

The company is however optimistic about their business performance for these products
in 2021. The company’s plan is to remain relevant and keep on supplying hygiene
products to increase customer confidence and along with that generate demand for
products which have not performed well in 2020 through advertisements and various
data analysis techniques. 

The company should also plan in increasing their online market and greater product
reachability through online means. The pandemic has not only improved the online
sector in general but has also aided in making the customers habitual towards online
market and home delivery of the products.

References
https://www.hul.co.in/investor-relations/quarterly-results/december-quarter-2020-
results/

https://www.hul.co.in/news/news-and-features/2020/huls-performance-highlights-
for-fy-2019-20.html

https://www.hul.co.in/Images/investor-presentation-22-07-2020_tcm1255-
553397_1_en.pdf

https://www.hul.co.in/Images/edelweiss-india-conference-feb-2021-vf_tcm1255-
559238_1_en.pdf

https://www.gsk.com/en-gb/media/press-releases/gsk-completes-divestment-of-
horlicks-and-other-consumer-healthcare-nutrition-products-in-india-and-certain-
other-markets/

https://www.gsk.com/en-gb/media/press-releases/gsk-to-divest-horlicks-and-other-
consumer-healthcare-nutrition-products-to-unilever/

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