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How HUL could benefit from $3.8 billion Horlicks deal

Hindustan Unilever (HUL) has agreed to acquire GlaxoSmithKline Consumer Healthcare Ltd in a 31,700 crore all-stock deal that will give the local unit of Unilever brands such as Horlicks, Boost and Viva

A plan by Hindustan Unilever Ltd.’s parent to buy GlaxoSmithKline Plc’s Indian consumer business for 3.3 billion euros ($3.8 billion) in cash and shares is positive for the local unit’s earnings, according to analysts, even as the price tag is said to be about $1 billion more than rival Nestle SA’s offer. Shares in Hindustan Unilever rose 4.1 percent on Monday to a record, while GlaxoSmithKline Consumer Healthcare Ltd. added 2.8 percent to its highest level since Sept. 21. In London, GlaxoSmithKline slumped 7.6 percent, the most in a decade, while Unilever NV was little changed in Amsterdam.

The buyout “is accretive from both an EPS and margin perspective" and “may lead to ~800-1000 basis points synergy on margins in a phased manner once the merger happens in 12 months time," Jefferies analysts Varun Lohchab and Tanmay Sharma wrote in a report Monday. Here’s what analysts are saying:

Credit Suisse ( Arnab Mitra)

Merger will make HUL’s food and refreshment business 1.6x larger and give it a strong nutrition brand which can be leveraged in more categories Raises FY21 earnings estimates by 6.5 percent Maintains neutral, lifts PT to 1,900 rupees from 1,770 rupees.

Citigroup ( Jamshed Dadabhoy)

Deal may take a year to complete given regulatory/shareholder approvals but it should be EPS accretive from day 1 Even without synergy benefits, the merger is EPS accretive for HUL to the extent of ~3.7% on FY21 earnings estimates HUL may have to pay parent a royalty from Horlicks brand sales.

Jefferies ( Varun Lohchab)

HUL’s distribution footprint is ~3x GSK’s, so it has potential to improve sales growth Valuations of Hindustan Unilever leave no room for error Maintains Hold, PT 1,650 rupees.

Prabhudas Lilladher ( Amnish Aggarwal)

Synergy benefits will start accruing from FY21 Expects one-time dividend in FY21, given that Glaxo has cash of 38 billion rupees ($539 million) on its books and Hindustan Unilever has 80 percent dividend payout Maintains hold, PT 1,880 rupee.

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