Полуфинал casecontrol

Changellenge >> Cup Russia 2013

M&A: “KALINA KRASNAYA” Ivanova Veronika

Kotlyarova Elena

Dadaev Alexandr

Chikhachev Victor

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Executive Summary COGS reduction

Dear colleagues, our team would like to present our unique business solution for Unilever to gain the maximum from the acquisition of Concern Kalina.

4.5%

46,75 42,25

Sincerely yours, CaseControl team 2010

2011

Shampoo market Others 26%

L’Oreal

12%

12%

Henkel

Unilever Kalina

23%

11% 21%

P&G

17%

SOURCES: case information, team analysis

Obtaining leadership in shampoo market Invasion face care market COGS reduction Widening distributional platform

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It is strategically important for Unilever to grow in the Russian personal care products segment Dynamics of Unilever’s market segments , 2010 Refreshment Food Homecare Personal care

Main market players in the personal care products area Henkel Others L’Oreal 30% 20%

1,4% 1,2%

14% 2,2% Beiersdorf 6%

10% 14%

P&G Kalina 6% Unilever Last year, personal care products section was the fastest growing section of Unilever.

Russian personal care products market is the largest in Eastern Europe. Rate of its growth is about 7% per year, remaining so up to this day.

4,2%

Unilever‘s shares in the personal care market sections Deodorants 37,9% Facial skin care – 0% Gels - 14,7% Oral Health – 0% Shampoos - 12,3%

In some segments of the Russian market Unilever is not yet present.

One of those segments is facial skin care and oral health. It is highly important because Unilever's main rival - P&G - is holding strong market positions with such brands as "Olay"

CaseControl SOURCES:

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Synergy in marketing and personnel expenses will reduce cost by 330 mln RUB Marketing expenses synergy

Kalina’s personnel reduction

Security services outsourcing

ADV Initiative Media

IT – 25 employees Finance – 80 employees HR – 35 employees

PSF Kriminalist, Ekaterinburg Securities salary 23 kRUB month, it is rather high compared to outsorsing companies (120 rub/h) Security services outsourcing Will reduce costs by 22 mln RUB

Unilever’s ATL marketing expenses 3 200 mln RUB Kalina’s marketing expenses 1 600 mln RUB Marketing expenses of joint company is 1,5 times higner than Unilever’s15% discount from ADV Media – cost cut by 240 mln RUB

IT payroll reduction 9 mln RUB Finance payroll reduction 24 mln RUB HR payroll reduction 10,5 mln RUB Total cost cut 43,5 mln RUB

Total cost reduction-330 mln RUB SOURCES: we assume no redundancy costs for Unilever

CaseControl

Decrease of package cost will lead to 5,4% reduction of COGS Prime cost 15% 30% 55%

Packaging cost reduction Package Freight cost

Raw materials Other

Package cost

More concentrated Volume discounts suppliers network – from suppliers CIS suppliers

Freight Current Supplier Plastek group, Pensylvania, USA Future Supplier Lean group, distance Minsk, Belorussia

Severnoe siyanie, St Petersburg

distance

Cost cut 198 mln RUB

Severnoe siyanie, St Petersburg

Package Increase of orders’ volume

7% discount

Total cost reduction=302 mln RUB ① SOURCES: ① Appendix

Cost cut 104 mln RUB

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Unilever can use traditional trade distributors of Kalina to increase revenue.

Joint logistic system will lead to local brand awareness Traditional trade Kalina’s distributors

Both Kalina’s and Unilever distributors

Foreign traditional trade Kalina’s distributors Бостон Казахстан, куча точек Торговый Дом «Юнилэнд Екатеринбург» Дистрибуция по Уралу BEST Pharm Молдова, Приднестровье, Кыргызстан Russian Style 97 Russian South SOURCES:

OOO Uniland Ekaterinburg Sverdlovsk Area

AOSS Far East

ИнтерХим И Юни и калина Нижний. Ярославль, мордовия, OOO NISSA Altai, Kemerovo Area +Юни АЮСС

Дальний Восток InterKhim Nizhniy Novgorod, Mordovia, Yaroslavl

Boston Group Kazakhstan

Best Pharm Mongolia, Ukraine

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Changes in the composition of products and in packaging design will render Kalina’s products more environmentally friendly.

Measure

Products

Impact

Substitution of Sodium Lauryl Sulfat for Sodium Laureth Sulfat

Black pearl foam , Pure line Cream Soap

Both ingredients force hair loss and irritate skin. chornyy zhemchug Although Laureth Sulfat is healthier.

Parabens cut down

Black Pearl foam contains 4 different types of parabens

Force allergy and cancer.

Timotei has launched organic parabens-free shampoo production

Eco-friendly package design

Black Pearl brand

Golden color used for packages design harms nature and human health

CaseControl SOURCES: www.unilever.ru, www.waste.ru

Price bid Minimum price – 17 029 231 010 RUB (Discounted future CF①) PV of synergy effect for 5 years

• 1 965, 65 mln RUB

Annual synergy effect

• 606,5 mln RUB

Maximum price – 17 029 231 010 RUB+1 965 650 000 RUB (Synergy) = 18 994 881 010 RUB

It’s time to merge!

CaseControl SOURCES:① Appendix

Appendix

CaseControl

Synergy in the procurement of raw materials and packaging. Part 1 - Preconditions Unilever’s and Kalina’s largest suppliers Location of main production

Kalina

Unilever

Ekaterinburg

St. Petersburg

Suppliers

Location of suppliers' factories

Supplied products

Appliance

Ltd.Mitra

Minsk, Belarus

Plastic packaging

Cream, shower gel

Laminated tubes

Toothpaste, cream

Aerosol

Hairsprays, deodorants

Plastic packaging

Cream, shower gel

Pennsylvania

Stick deodorants

Lean Group Minsk, Belarus Novomoskovsk, Nevinnomysk, JSC Arnest Russia Esselpropa Moscow Region, ck Russia Plastek Pennsylvania, group USA

Opportunities for synergy: 1) From the table it can be inferred that Unilever's main supplier of packaging for deodorants and sticks is Plastek Group, which is located in the USA, therefore, Unilever can benefit by relocating some portion of purchases from Plastek to JSC Arnest or Lean Group => benefits are gained from freight cost savings 2) Similar packaging suppliers and similar demand for packaging can be identified in both listed companies.

Consequently emerges the possibility to gain from placing larger orders in order to receive discounts on products. These orders can be arranged with Esselpropack, Ltd. Mitra or Lean Group 3) Unilever spends too much time and money to recheck suppliers with the help of different outsourcing agencies: SEDEX, Acchilles. Kalina has proven distributors - no need to waste resources on rechecking

CaseControl

SOURCES: companies websites

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Synergy in the procurement of raw materials and packaging. Part 2 - Calculations Packaging costs in 2010 without synergy:

Company

Total COGS 2010, kRUB

Kalina Unilever Russia

Share of Body and Facial care COGS for packaging, segment Share of COGS for packaging kRUB

5 457 162

100%

55%

3 001 439

13 796 097

33%

55%

2 503 992

Benefits from the synergy : 1) Savings on cargo delivery: relocation of procurement packages for deodorants from the U.S. to Belarus: 50% of products made in St. Petersburg - deodorants, 20% of the costs – transportation costs = 2503992*50%*20%=250 399,2kRUB The cost of US-Russia shipping – 5,000$*30,3692=151,846kRUB① The cost of Belarus – Russia shipping = 32kRUB② (21% of 151,846) Saving= 250 399,2 kRUB*79%=197815,4 kRUB 2) Economy of scale : Deodorant packaging costs (Unilever) (without freight)=2503992*50%*80%= 1001596,8kRUB Costs (Kalina) (20% of Kalina's production – deodorants and sprays)=3001439*20% *80%=480230,3kRUB If Unilever buys from Kalina's supplier then the procurement volume increases from 480230,3kRUB to 1001596,8kRUB+480230,3kRUB=1481827,1kRUB – three times more. Assuming this will allow for a discount of 7%=1481827,1kRUB*7%=103727,9kRUB 3) Economy on time spent searching for new suppliers in Russia & CIS Total savings from synergy in procurement of raw materials = 197815,4kRUB+103727,9kRUB=301543,3kRUB in % of the total cost of packaging = 301543,3/5505431=5,4%

CaseControl

SOURCES: ①

http://www.ztm.ru/usa/ ② http://www.della.ru/value/16/

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Discounted future CF Current Financial Information for Concern Kalina (2010) Revenues in current year = COGS as % of Revenues = Tax Rate on income = Interest Expenses = Current Depreciation = Current Capital Spending = Working Capital as % of Revenue = Projections of growth in earnings Expected growth rate - next 5 years = Expected growth rate - after 5 years =

11 672 588,07 46,75% 35,00% 408 564,67 397 009,83 131 607,31 30,48% 5,00% 3,00%

Current risk free rate = Risk premium over riskfree rate =

8,00% 10,00%

Free Cashflow to Equity

3 870 418,05

CF for the next 5 years YEAR 1 2 3 4 5

SOURCES:

FCF 4 063 939 4 267 136 4 480 493 4 704 517 4 939 743

Present value of CF for the next 5 years

17 029 231kRUB

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CaseControl

Name: Veronika Ivanova Education: The Russian Presidential Academy of National Economy and Public Administration, first year master student Achievements: Double degree in economics and management (Grenoble-RANE)

Name: Elena Kotlyarova Education: Moscow State University, first year master student Achievements: Best student 2011, The Russian Presidential Academy of National Economy and Public Administration

Name: Alexander Dadaev Education: Financial University under the Government of the Russian Federation, first year master student Achievements: Double degree in economics and management (Grenoble-RANE)

Name: Victor Chihachev Education: The Russian Presidential Academy of National Economy and Public Administration, first year master student Achievements: Microsoft project proffesional sertificate 2010