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GSK Plc said it would sell the stake once the merger was completed in early 2020. It didn’t say when it would do so and that the sale would occur in “tranches”.
The company is hoping to cash out what will be a near 6 per cent stake in HUL after a pending merger approval comes through, possibly by the end of this month. The groundwork has already been initiated with feelers going out to some marquee institutional investors keen to buy into the India consumption story.
On completion of the merger, GSK’s stake, based on the Friday close of Rs 2,005.90 per share, could be valued at Rs 26,580 crore ($3.7 billion) on an expanded equity base. That could make it one of the largest block trades in India. The valuation is a near 17 per cent appreciation over the price at which the merger had been announced.
GSK Plc said in October that the value of HUL shares to be received on the disposal of Horlicks and other consumer healthcare brands had risen £247 million in nine months. The cumulative increase in value since the deal was signed is £345 million.
“I can confirm that the divestment of Horlicks is progressing well and we are currently working towards completion in Q1, 2020, subject to receipt of regulatory approvals,” said Simon Steel, a spokesperson of GSK Plc. “Following completion of the transaction, we intend to sell down our holding in HUL. Such sell-down will be in tranches and at such times as GSK considers appropriate. We can’t comment further on specifics at this time.”
The deal structure announced in December 2018 valued GSK Consumer Healthcare at Rs 31,700 crore. Its shareholders were to receive 4.39 shares of HUL for each of their own. After the merger, which was to get completed in a year, GSK Plc was to become the second-largest shareholder in the merged entity with a 5.7 per cent stake while Unilever’s holding in HUL was to fall to 61.9 per cent from 67.2 per cent.
After shareholder and Competition Commission of India (CCI) approvals earlier in the year, the Mumbai bench of the National Company Law Tribunal (NCLT) assented to the merger. However, GSK Consumer is yet to receive the approval of the NCLT bench in Chandigarh, forcing a revision of the closure outlook from the earlier CY2019.
“Work has begun though the process is likely to kickstart in the New Year. The target is January or February, depending on approvals and market dynamics,” said an executive.
“This will be a market trade distributed among institutional investors and with no rights… Considering the size, it’s not clear yet if it will be done in a single tranche or in multiple blocks like Daiichi Sankyo and Sun Pharma in April 2015… GSK needs the cash to pay off its global obligations, so it would want to do it at the earliest as per its stated position.”
The UK pharma and consumer giant had syndicated bridge loans worth $13 billion in April 2018 from a group of global underwriters, including Barclays, JP Morgan and Citi, to finance its purchase of the stake held by Novartis a consumer healthcare joint venture. That also led to a strategic review of the India business along with its flagship brand Horlicks and the eventual sale to HUL.
Morgan Stanley, according to sources, is advising on the share sale. One more global investment bank is also likely to be mandated to manage such a large trade.
Feelers have gone out to Canadian investors and pension funds such as CPPIB as well as sovereign wealth funds like GIC and Temasek among others that are also active in public market, said one of the people cited above. This could not be independently verified from multiple sources.
CPPIB and Temasek declined to comment. GIC didn’t respond to queries.
Analysts said the trade will be profitable for GSK, especially since the pound has not moved much last year. The HUL stock on the other hand has appreciated, benefiting from tax cuts and momentum in large-cap counters.
“At 74 per cent, even post the merger, HUL boasts of the highest return on equity (RoE) in our coverage universe,” said IIFL analyst Percy Panthaki. “The stock is not cheap at 47x FY21 EPS, but deserves a premium due to its superior portfolio and execution.”
HUL has been a steady performer compared with most peers in the consumer staples space that are grappling with overall market sluggishness on the back of a sustained rural slowdown. The July-September quarter saw its margins expand 150 basis points with the premium laundry, skin care, colour cosmetics and food and refreshments portfolio remaining bright. The company is also taking corrective action to recoup market share in parts of the skin cleansing portfolio.
(Additional Reporting by Reghu Balakrishnan)
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