Unilever Plc is in exclusive talks with GlaxoSmithKline Plc (GSK) to acquire Horlicks, reported the Financial Times. If the deal happens, it will be Unilever’s most ambitious acquisition in India after its subsidiary Hindustan Unilever Ltd (HUL)—then known as Hindustan Lever Ltd—acquired Tata group’s soaps and personal care businesses in the 1990s. A natural assumption is that HUL will be the vehicle for this takeover, although it will only become clear after a deal is announced. Unilever may acquire GSK’s stake in locally listed GSK Consumer Healthcare Ltd, which sells Horlicks and other brands in India, and then merge the company with HUL.

Why Horlicks? One place where HUL’s reign has not expanded much over the decades is the Indian kitchen. Sure, it does have tea, coffee and ketchups in its portfolio, but it missed opportunities such as instant noodles, breakfast cereals and dairy products. It may have had its reasons for staying away, but with Horlicks, it has a chance for redemption.

Unilever’s food and refreshments business contributes 38% of revenue (and this is after several divestments in recent years); in HUL’s case, the segment contributes only 18% of revenue.

Acquiring GSK Consumer can take its contribution up to 28%. It will also add to profitability. HUL’s foods segment profit margin was 16.9%, compared to GSK Consumer’s Ebit (earnings before interest and tax) margin of 31.4%. Of course, the price paid for the business will determine if the addition to sales and profitability will be worth it. Then, there’s the cost savings from elimination of overlapping functions. But that is for later to analyse, when the deal is announced.

What about the business logic though? Horlicks does target parents (mothers, mostly) and children. That’s an audience HUL is also familiar with. But Horlicks is a health food drink, competing with other products such as Complan, chocolate syrups such as Hershey’s and nutrition products from pharmaceutical companies such as PediaSure. This takes it into uncharted territory.

Horlicks is also chiefly a one-trick pony, with very little success in its attempts to extend to products such as noodles or biscuits. That’s an area that HUL may do well to correct.

Then, there is this question of Horlicks operating in a slowing market for health drinks, its ability to compete with newer products, especially from pharmaceutical companies, and whether it provides any real health benefits.

While the narrative has been that Horlicks will find it difficult to hold its ground, GSK Consumer’s September quarter results give reason for a rethink. Sales rose by 14.4% in value terms and 13.7% in volume over a year ago, which is healthy by itself and also when compared to its peers in the FMCG universe.

OPINION | Horlicks may not be such a sweet deal

What explains GSK Consumer’s growth if the market is indeed slipping away? Higher sales of sachets, or small price packs, is one reason. Sure, it also invested 11% of sales behind advertising but margins were good too, so it can continue to do that. In a new owner’s hands, Horlicks could turn out to be more valuable. But there is that matter of the asking price and whether it will prove to be worth it.

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