Merger & Acquisition

Project Report
on
Merger of GSK & HUL

Batch: 2022-2024

Section: A

SUBMITTED BY:

NAME OF THE PERSON ENROLLMENT NO.

Tejas Rishi 22BSPHH01C1274

Mohammad Kamran Ejaz 22BSPHH01C0664

A DISSERTATION
In partial fulfilment of the requirement of the degree of
MASTER OF BUSINESS ADMINISTRATION
Under Guidance of
Dr. Nitya Nand Tripathi
 Acknowledgement

It is a great pleasure to have this opportunity to express the feeling of gratitude imprisoned in the
deepest core of our hearts.
We would like to express our sincere gratitude to our faculty Dr. Nitya Nand Tripathi for providing
valuable guidance, comments, and suggestions throughout this project. Her kindness and help have
been a source of encouragement for us. We are grateful to her for the guidance inspiration and
constructive suggestions that helped us complete the project.

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Valuation- It is the process of determining the value of a (potential) investment, asset, or security.
Generally, there are three approaches taken, namely:

1. discounted cashflow valuation

2. relative valuation
3. contingent claim valuation

Valuations can be done for assets (for example, investments in marketable securities such as
companies' shares and related rights, business enterprises, or intangible assets such
as patents, data and trademarks) or for liabilities (e.g., bonds issued by a company). Valuation is a
subjective exercise, and in fact, the process of valuation itself can also affect the value of the asset in
question

Valuations may be needed for various reasons such as investment analysis, capital
budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the
proper tax liability. In a business valuation context, various techniques are used to determine the
(hypothetical) price that a third party would pay for a given company; while in a portfolio
management context, stock valuation is used by analysts to determine the price at which the stock is
fairly valued relative to its projected and historical earnings, and to thus profit from related price
movement.

Common terms for the value of an asset or liability are market value, fair value, and intrinsic value.
The meanings of these terms differ. For instance, when an analyst believes a stock's intrinsic value is
greater (or less) than its market price, an analyst makes a "buy" (or "sell") recommendation.
Moreover, an asset's intrinsic value may be subject to personal opinion and vary among analysts.
The International Valuation Standards include definitions for common bases of value and generally
accepted practice procedures for valuing assets of all types.

Regardless, the valuation itself is done generally using one or more of the following approaches:

1. Absolute value models ("Intrinsic valuation")- It determines the present value of an asset's
expected future cash flows. These models take two general forms: multi-period models such
as discounted cash flow models, or single-period models such as the Gordon model (which,
in fact, often "telescope" the former). These models rely on mathematics rather than price
observation.

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 2. Relative value models- It determines the value based on the observation of market prices of
'comparable' assets, relative to a common variable like earnings, cashflows, book value or
sales. This result will often be used to complement / revisit the intrinsic valuation

3. Option pricing models- In this context, are used to value specific balance-sheet items, or the
asset itself, when these have option-like characteristics. Examples of the first type
are warrants, employee stock options, and investments with embedded options such
as callable bonds; the second type are usually real options. The most common option pricing
models employed here are the Black–Scholes-Merton models and lattice models. This
approach is sometimes referred to as contingent claim valuation, in that the value will be
contingent on some other asset.

Types of Valuation Methods:

 Comparable Method: The comparable company analysis is a method that looks at similar
companies, in size and industry, and how they trade to determine a fair value for a company or
asset. The past transaction method looks at past transactions of similar companies to determine
an appropriate value. There's also the asset-based valuation method, which adds up all the
company's asset values, assuming they were sold at fair market value, to get the intrinsic value

 Discounted Cash Flow Method: Analysts also place a value on an asset or investment using the
cash inflows and outflows generated by the asset, called a discounted cash flow (DCF) analysis.
These cash flows are discounted into a current value using a discount rate, which is an assumption
about interest rates or a minimum rate of return assumed by the investor.

For This report we have taken Discounted Cash Flow Method

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 Company Overview

GSK plc, (an acronym from its former name GlaxoSmithKline plc,) is a British multinational
pharmaceutical and biotechnology company with global headquarters in London. Established in 2000
by a merger of Glaxo Wellcome and SmithKline Beecham, GSK is the tenth largest pharmaceutical
company on the 2022 Fortune Global 500, ranked behind other pharmaceutical companies China
Resources, Sinopharm, Johnson & Johnson, Pfizer, Roche, AbbVie, Novartis, Bayer, and Merck
Sharp & Dohme. The company has a primary listing on the London Stock Exchange and is a
constituent of the FTSE 100 Index. As of August 2022, it had a market capitalisation of £70 billion,
the eighth largest on the London Stock Exchange. It has a secondary listing on the New York Stock
Exchange.

The company developed the first malaria vaccine, RTS, S, which it said in 2014, it would make
available for five per cent above cost. Legacy products developed at GSK include several listed in
the World Health Organization's List of Essential Medicines, such as amoxicillin, mercaptopurine,
pyrimethamine and zidovudine

In 2012, under prosecution by the United States Department of Justice (DoJ) based on combined
investigations of the Department of Health and Human Services (HHS-OIG), FDA and FBI, primarily
concerning sales and marketing of the drugs Avandia, Paxil and Wellbutrin, GSK pleaded guilty to
promotion of drugs for unapproved uses, failure to report safety data and kickbacks to physicians in
the United States and agreed to pay a US$3 billion (£1.9bn) settlement. It was the largest health-care
fraud case to date in the US and the largest settlement by a drug company

Joseph Nathan and Co. was founded in 1873, as a general trading company in Wellington, New
Zealand, by a Londoner, Joseph Edward Nathan. In 1904, it began producing a dried-milk baby food
from excess milk produced on dairy farms near Bunnythorpe. The resulting product was first known
as Defiance, then as Glaxo (from lacto), and sold with the slogan "Glaxo builds bonnie babies The
Glaxo Laboratories sign is still visible on what is now a car repair shop on the main street of
Bunnythorpe. The company's first pharmaceutical product, released in 1924, was vitamin D

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Hindustan Unilever Limited (HUL) is a British-owned Indian consumer goods company
headquartered in Mumbai. It is a subsidiary of the British company Unilever. Its products include
foods, beverages, cleaning agents, personal care products, water purifiers and other fast-moving
consumer goods. HUL was established in 1931 as Hindustan Vanaspati Manufacturing Co. Following
a merger of constituent groups in 1956, it was renamed Hindustan Lever Limited. The company was
renamed again in June 2007 as Hindustan Unilever Limited.

Hindustan Unilever has been at the helm of a lot of controversies, such as dumping highly toxic
mercury-contaminated waste in regular dumps, contaminating the land and water of Kodaikanal. The
British company also faced major flak for an advertising campaign attacking the Hindu pilgrimage
site at Kumbh Mela, calling it a "place where old people get abandoned” a move that was termed
racist and insensitive.

As of 2019, Hindustan Unilever's portfolio had more than 50 product brands in 14 categories. The
company has 21,000 employees and recorded sales of ₹34,619 crores in FY2017–18

In December 2018, HUL announced its acquisition of GlaxoSmithKline India's consumer business
for US$3.8 billion in an all-equity merger deal with a 1:4.39 ratio. However, the integration of GSK's
3,800 employees remained uncertain as HUL stated there was no clause for retention of employees
in the deal. In April 2020, HUL completed its merger with GlaxoSmithKline Consumer Healthcare
(GSKCH India) after completing all legal procedures. In December 2022, HUL's market cap was Rs.
638548.42 crore.

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 GSK and HUL Merger

Hindustan Unilever Ltd (HUL) has completed the merger of GlaxoSmithKline Consumer Healthcare
Limited (GSKCH) with itself, over a year after the Rs31,700 crore mega-deal was first announced.
The company has additionally paid Rs3,045 crore to acquire the Horlicks brand for India from GSK
after seeking approval from the board of directors of HUL exercising the option available in the
original agreement made between Unilever and GSK

GSKCH’s brands such as Horlicks, Boost, and Maltova will now be part of the company’s food and
refreshments business falling under the nutrition category. As part of the merger, 3,500 employees
will now become part of the Indian arm of the Anglo Dutch giant Unilever. Under the deal, HUL will
distribute GSK’s brands like Eno, Crocin, Sensodyne etc in the country.

Post the completion, GSK Plc (including group companies) will own 5.7% of the merged entity; while
Unilever shareholding in the combined company will be 61.9% versus 67.2% prior to the merger. The
merger was first announced in December 2018 — making it one of the deals in India and giving HUL,
already India’s largest packaged consumer goods company, more room to dominate. The merger was
awaiting necessary regulatory approvals since.

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 Rationale for the Merger:

1. Strengthen HUL's position in the Health Food Drinks (HFD) market: GSK CH brought its
iconic Horlicks brand, along with Boost, Maltova, and Viva, to HUL's portfolio, solidifying its
leadership in the growing HFD segment.

2. Leverage HUL's extensive distribution network: HUL's wide reach with retailers and grocery
stores would boost the distribution and penetration of GSK CH's brands, particularly in rural
areas.

3. Synergies in advertising, marketing, and overhead costs: Combining operations allowed for
cost optimization through economies of scale in advertising, marketing, and administrative
functions.

4. Unlock growth potential in premiumization and North & West India: The merger aimed to
drive premiumization strategies for GSK CH brands and leverage HUL's expertise to tap into the
untapped growth potential in North and West India.

Transaction structure

 The merger of GSK Consumer Healthcare Ltd with HUL will be based on an exchange ratio of 4.39
HUL shares for each GSK share.
 GSK consumer’ lead brand Horlicks will be acquired by Unilever i.e. the parent company of HUL
 All the GSK shareholders will be public shareholders of HUL post-merger.
 There is a dilution in the promoters’ equity by 5.28%. Simultaneously there is also an increase in
the public shareholders, the major increase being promoters of GSK holding around 6 % in the
public shareholding category of HUL post-merger.
 Unilever's holding in HUL was diluted from 67.2% to 61.9%.

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 Understanding from the Valuation of the company-
1. The synergy of the firm is 1,28,592.82.
2. DCF value of the Firm post-merger is 4,48,208.08.
3. Value of HUL is 5,90,543.
4. DCF value of the firm premerger was 3,29,614.25

Overall, the merger of HUL and GSK CH has been a success story, propelling HUL to a stronger
position in the Indian FMCG market and creating a dominant player in the HFD segment. However,
ongoing integration efforts and market competition will determine the long-term impact of this
landmark deal.

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 Interpretation

After Merger:

Turnover refer to the accounting concept that measures how quickly a business collects cash from
accounts receivable or sells its inventory, which is also known as inventory turnover or accounts
receivable turnover. Overall turnover is a synonym for a company's total revenues and, after the
merger of the 2 companies the turnover of HUL keeps on increasing at a constant growth rate which
is 4% whereas, the turnover of GSK is also increasing but with a high percent as compared to HUL.
For 2 years it was growing at a rate of 20% and for the rest of the years, it was growing at a constant
growth rate of 30%. Total turnover growth in the year 2019-20 was 6% and by the end of the year
2024-25 it has grown up to 10%.

EBIDTA growth after merger was 16% in the year 2020-21 with almost half way drop in the growth
percent to 8% but again it bounces back to 15% in the year 2022-23 with a slight drop in the year
2024-25. Present value of cashflow is amount to Rs. 72,975.10. present terminal value is
Rs.3,85,232.97. discounted cash flow value of the firm is Rs.4,58,202.08. The amount of synergy to
be calculated was determining at Rs.1,28,593.82.

Pre- Merger:

The turnover for HUL was same as and before merger which was 4% throughout the entire year from
2019 to 2025 and the same goes for GSK where the turnover growth was moving at a constant rate
i.e., 20% before merger. The turnover growth for both the companies’ combined was 6% for the year
2019 to 2021-22 and 7% for the year 2022 to 2024-25 which was very low as compared to the stats
when they got merged.

EBIDTA for both the companies was constant (HUL-32%, GSK-25%). The EBIDTA growth
combined for both the companies was very low and almost constant after dropping from 33% in the
year 2019-20 to 6% in the year 2020-21. Present value of cashflow is amount to Rs. 59,986.38. present
terminal value is Rs.2,69,627.87. discounted cash flow value of the firm is Rs.3,29,614.25.

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Synergy:

 GSK and HUL expect significant synergies through supply chain opportunities and
operational improvements, go-to-market, and distribution network optimization, scale
efficiencies in cost areas such as marketing and optimization of overlapping infrastructure.
 The amalgamation resulted in the consolidation of the business of the companies resulting in
expansion of the consolidated business and creation of greater value for shareholders and all
other stakeholders
 The amalgamation is in the interest of the public shareholders of GSK, as they would
continue to play a part in the Indian consumer growth through one of India’s leading fast-
moving consumer goods companies i.e. HUL
 HUL will distribute GSK’s Over-the-Counter and Oral Health products under a consignment
selling agreement (5 years).
 HUL share has increased by 24% in two weeks, due to an increase in personal hygiene
product demand due to Corona and after a successful deal with GSK

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 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.

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 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.

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