Changellenge >> Cup Russia 2013 Semifinal, April 23, 2013
UNILEVER M&A: «KALINA KRASNAYA» INTEGRITY Management Consulting Ageev Sergey Butakova Yulia Buzko Roman Syrunina Ekaterina
INTEGRITY
0
CONTENT
The structure of the presentation is outlined in the table of content
1
Attractiveness of the deal
Slide 3
2
Calculation of stand alone price of Kalina
Slide 4
3
Estimation of synergy effects
Slide 5
4
Implementation of acquisition
Slide 6
5
Post-acquisition strategy
Slide 8
6
Our team
Slide 9
7
Appendices
Slide 10
INTEGRITY
2 Slide 2
1
Acquisition of Kalina is favorable due to potential market growth, consumer preferences development and extension of product portfolio and channels of distribution
ATTRACTIVENESS OF THE DEAL
1. Russian market of Personal care products tends to grow with average predicted growth rate of 6.7%, that is higher than market average Predicted CAGR , 2010-2014
13,0%
200%
GNI per capita, USD
Russian market growth (2010 - 100%)
2. Purchasing power and personal care spending of the consumer has an upward potential
10,0% 6,7%
100%
3,4%
2,1% 1,9%
Brazil
China
Russia
World Germany
USA
60
1,1%
Germany Sweden
50 40
India
0 0
3. Acquiring Kalina will allow Unilever to increase its market share to 16.4%, occupying the 2 nd place in Russian personal care products market due to increasing presence in 5 of 8 key product segments
P&G; 13,50%
INTEGRITY
France
Ukraine 100
150
200
250
300
350
4. Unilever will increase its presence in other distribution channels, namely non-chain supermarkets, superettes and pharmacies
Distribution channels for PC products, %
23,2% 10,0%
5,6% 0% hair care
Beiersdorf ; 6%
15,7%
12,3%
Kalina; 6,20% other; 30,00%
Denmark
30,4% Unilever; 10,20%
Henkel; 19,90%
50
Italy
Norway USA Switzerland
Average consumption of personal care products per capita, USD
41,2% L'Oreal; 14,20%
Poland Bulgaria
China
10
France
UK
Russia
30 20
0%
2010 2011 2012 2013 2014 2015 2016
70
face care
Unilever
hand&body care
0%
0%
oral care
baby cosmetics
Unilever+Kalina
Sources: case materials, Reuters, Kline & Co, AT Kearney research, http://articles.pubarticles.com/indian-cosmetic-market-set-to-grow-at-18-cagr-1302244611,140265.html, app. 1
pharmacies 8% superettes 4%
beauty care shops 51% Super- and hypermarket s 31%
Slide 3
STAND-ALONE PRICE
2
FCF model
Stand alone price of 363 mln USD is lower than market value of equity based on multiples (452 mln USD) as the market already includes some synergy expectations Sensitivity analysis [app. 4 ]
Assumptions 1.
The value of the company is calculated for year 2012 (base year = end 2011) 2. FCF = OCF – ICF = NOPAT – Capital investments 3. In order to obtain value of equity net debt should be deducted 4. Growth rate for years 2012-2016: - For NOPAT g1 = 10.15% (average of historic and projected growth rates) - For investments g2 = 1.77% 5. Perpetual growth rate g3 = 3.4% after 2016 6. WACC = 11.51% [app. 3 ]
800 EV value 600
400 200
-90%
-70%
-50%
NI growth
-30%
0 -10%
Perpetual growth
10%
30%
50%
investment growth
70% 90% Risk factor change
Growth rate
2010
2011
2012
2013
2014
2015
2016
NOPAT
10.15%
1275.60
1405.08
1547.69
1704.78
1877.82
2068.42
2278.36
Investments (Δ Net Assets)
1.77%
-714.00
-726.64
-739.50
-752.59
-765.91
-779.47
-793.26
561.60
678.44
808.19
952.20
1111.91
1288.95
1485.10
18942.96
724.80
765.82
801.99
833.75
861.50
10,988.76
Net debt, mln USD
127.00
Value of equity, mln USD
363.23*
FCF DCF @ WACC
11.51% Value, mln USD
INTEGRITY
490.23*
Sources: Kalina annual report, Reuters.com, case materials, Central bank of Russia * Value in mln RUR = 14,976.63; Value of equity in mln RUR = 11,096.78
CV
Slide 4
Impact of synergies amounts to 1,380 mln USD in total which is distributed between operational cost improvements and additional EBIT increase [app. 5]
ESTIMATION OF SYNERGY EFFECTS
3
Synergy effects have a significant impact on acquisition price of Kalina: Synergy on improvement of distribution platform
Scenario Analysis
Synergy on sales cost reduction Synergy on administrative costs reduction
Cumulative CF, RUR bln.
ďƒź They result in 91% total increase in EBIT ďƒź They can be realized almost immediately after acquisition - from year 2012
8 6,70
6
Synergy on transportation & storage cost reduction
82
542
2 893
19 Total effect +91%
251
5,25 4
3,85 2,50
2
Synergy on media buying
1,22 0 2012
Scenario
2013 optimistic
2014 realistic
2015 pessimistic
13.6% growth rate of the last 3 years
realistic
10.15% 6.7%
INTEGRITY
1 513
Base-line
NI growth
optimistic
pessimistic
2016
485
average between market growth rate and growth rate of the last 3 years market growth rate Sources: Kalina annual report, case materials,
EBIT before acq.
media
transportation
administrative
sales
EBIT from EBIT after extra sales acq.
Costs reduction
Slide 5
4
ACQUISITION STRATEGY Selection of M&A type
Unilever should choose to purchase Kalina shares (from different M&A types)
Corporate structure and operations
Liabilities
Compatibility of legal forms
• Existing identity and goodwill are not preserved • Operations may disruptively change
Liabilities do not carry over to the Buyer
No specific requirements
Merger
• Remain unchanged • Full integration with the Buyer
Undisclosed or contingent liabilities carry over to the Buyer
The Buyer and the Target have to be of a same legal form
Stock Purchase [app. 6]
• Remain unchanged • Full integration with the Buyer
Undisclosed or contingent liabilities carry over to the Buyer
Assets Purchase
INTEGRITY
No specific requirements
Approval by the Target
May require approval by the Target’s board
Needs to be approved by all shareholders of the Target
Confidentiality
Cannot be preserved
Cannot be preserved
• No need to get approval from the Target’s board May be preserved • Negotiate directly with for certain period the selected shareholders of the Target
Sources: team judgment, M&A. A step by step legal and practical guide. Edwin L. Miller Jr.
Slide 6
4
ACQUISITION STRATEGY
Full acquisition and control of Kalina will occur in three stages: entry, increase of control and squeeze-out Visualization
Description
In the 1st stage, Unilever will need to obtain enough shares of Kalina in order to get access to the register of Kalina’s shareholders (at least 1%). Confidentiality is of vital importance at this stage. Foreign Agent In order to preserve confidentiality, Unilever Russia may retain a foreign company to act on its behalf in the contemplated transaction
Russia
1. Entry
Offshore Offshore Company (Agent, Nominee)
2. Increase of control
Russia
Offshore Offshore Company (Agent, Nominee)
Call shareholders meeting Initiate redemption
Full operational control
3. Squeeze-Out
Russia Offshore
INTEGRITY
Offshore Company (Agent, Nominee)
Sources: team judgment, M&A. A step by step legal and practical guide. Edwin L. Miller Jr.
In the 2nd stage, after acquiring sufficient stake in Kalina, Unilever acting through its agent should call the meeting of shareholders in order to initiate the redemption procedure. Redemption Process By reducing the number of outstanding shares through redemption, Unilever (its agent) would increase its own portion of shares In the 3rd stage, Unilever will assume full operational control over Kalina and initiate squeeze-out procedure in order to gain 100% stake in the company. Squeeze-Out Squeeze-out refers to compulsory acquisition of the shares of minority shareholders
Slide 7
4
POST-ACQUSITION STRATEGY
Value chain primary activities
Post-acquisition strategy includes integration of Kalina primary and secondary activities within Unilever value chain Operating Decision
Use Acquirer's Operating Model
Use Target's Operating Model
Use Combined Operating Model
Use New Operating Model
Brand
Rebrand target’s products with acquirer's brand
Rebrand acquirer's products to target’s brand
Co-brand all products
Rebrand all products to a new brand
Sales & marketing
Use acquirer's existing sales force to sell target’s products
Use target’s sales force to sell target’s products
Combine and reconcile sales forces
Use target’s sales force as advisors to acquirer's sales force
Distribution Distrib. channels
Push target’s products through acquirer's channel partners
Continue to use target’s channel partners
Use acquirer's channel partners in Moscow, target’s partners in rest of Russia
Go through new channels as bundled product
R&D
Develop target’s product in acquirer's labs
Develop all products in target’s labs
Combine and optimize R&D teams in new lab facility
N/A
Use existing suppliers to source target’s products
Retain target’s suppliers for target’s products
Combine and reconcile suppliers for volume discounts
Pursue new suppliers
Production
Fold target’s factories into acquirer's network
Maintain target's manufacturing network
Use target’s factories as captive suppliers to client’s factories
Outsource all manufacturing
Logistics
Push target’s products through acquirer's delivery network
Push target’s products through target’s delivery network
Use target’s reverse logistics and acquirer's forward logistics
Pursue new logistics partners
Sourcing
INTEGRITY
Sources: team evaluation and judgment, M&A. A step by step legal and practical guide. Edwin L. Miller Jr.
Value chain secondary activities
HR Finance
140 employees are laid off or integrated within other Unilever business units
IT
Optimization of supportive personnel structure Convergence of corporate culture toward the Unilever one
Slide 8
5
OUR TEAM
Our team of talented professionals Integrity will solve any case of our client
Sergey Ageev Saint-Petersburg
Yulia Butakova Saint-Petersburg
Education Specialist in Corporate Economics and Management, SPbU’14
Education Master in Corporate Finance, GSOM, SPbU’14
Achievements Henkel Innovative Challenge 2012 – winner Changellenge SPb 2013 winner
Achievements Semi-finalist Changellenge SPb 2012
sergey.ageev2@gmail.com +7 952 371 0277
july.butakova@gmail.com +7 911 744 7492
INTEGRITY
Roman Buzko Saint-Petersburg
Ekaterina Syrunina Saint-Petersburg
Education Herzen State University, Law Faculty’14
Education Master in International Business, GSOM, SPbU’14
Achievements Baker & McKenzie, summer intern 2012
Changellenge SPb 2013 Final 3rd place
Achievements PwC, intern in Advisory department (corporate finance) Changellenge SPb 2013 Final 3rd place
roman.buzko@gmail.com +7 911 007 6762
ekaterina.syrunina@gmail.com +7 931 368 6992
Slide 9
6
Attractiveness of the deal Appendix 1
5. Acquisition of Kalina will increase the consumer base: Children Older loyal females with higher income who appreciate quality
Unilever
Brand Dove Gender М/W
Target age 30+
Axe М
< 25
Kalina
Black Sunsilk Pure line pearl W
17-25 25-45
Low/ Averag Averag Income e e Low
INTEGRITY
W
W
25-55
6. Acquisition of Kalina will increase intensity of geographical coverage Kalina distribution network expands into the regions (small non-chain supermarkets, superettes) whose economic and social position looks favorable for development
Little fairy Children + Parents
Children(3-7), Parents 25+
Low/ Average Average Average
region
regional sales
Scale of economy (number of employed)
Scale of economy (consolidated revenues)
Social Volume of level retail Volume of GDP per (unemplo trade per retail trade per GDP per capita yment capita (in capita, Growth capita growth rate) rubles) rate
Central region
39%
19716,3
2102883,6 348099,9
16,8%
4,7%
147032
14,00%
Volga region Siberia
12,20% 15,20%
14664,5 9140,4
1006520,4 189071,4 793833,2 212439,7
15,3% 20,8%
7,6% 8,7%
100297 91799
4,50% 10,70%
Northwes t region South Ural Far East
10,50% 7,90% 11,50% 3,70%
7188,0 6438,7 6005,1 3142,1
759032,7 286827,7 416570,6 165578,8 720608,1 420919,8 463762,3 334306
14,2% 14,9% 16,6% 22,2%
6,2% 7,7% 8,0% 8,7%
113456 107030 132228 104255
13,09% 16,30% 8% 11,40%
TOTAL (Russia)
Sources: case materials, Unliever, Kalina web pages, team estimations, Ministry of finance,
261803,7
7,5%
Slide 10
6
Attractiveness of the deal Appendix 1
Unileverâ&#x20AC;&#x2122;s production and distribution facilities - Production plants - Distribution centers
Facilities
INTEGRITY
Sources: case materials, Central Bank of Russia, the team computations
Location
Production (1)
St. Petersburg
Distribution centers (12)
Moscow, St.Petersburg, Kazan, Samara, Volgograd, Rostov, Yekaterinburg, Novosibirsk, Omsk, Chabarovsk, Petropavlovsk Kamchatsky, Krasnoyarsk, Murmansk
Slide 11
6
Attractiveness of the deal Appendix 1
Unilever and Kalina together: - Production plants - Distribution centers
ď&#x192;ź Extended production capacity ď&#x192;ź Enlarged distribution capacity
INTEGRITY
Sources: case materials, Central Bank of Russia, the team computations
Slide 12
6
MULTIPLES FORECAST Appendix 2
2010
2011F
2012F
EV/CF
13,1
15,3
13,8
454,3
CF, mln USD
43,89
38,56
41,96
62,7
68,5
CF, mln RUR
1337,863
1131,797
1281,772
1914,144
1840,245
2092,675
84,60%
113,25%
16,30%
14,40%
15,10%
NI, mln USD
32,1
32,7
37
NI, mln RUR
978,408
959,745
1130,35
EPS, USD
3,93
5,08
5,75
EV, mln USD
575
590
579
EV, mln RUR
17526
17316,5
17688,45
EV/Sales
1,50
1,36
1,27
Net debt, mln USD
127
135
Equity, mln USD
448
Equity, mln RUR
13655,04
2010
2011F
2012F
Exchange rate
30,48
29,35
30,55
Sales, mln USD
384,4
434,2
EBITDA, mln USD
62,8
EBITDA, mln RUR EBITDA margin, %
change in CF, % EV/EBITDA
9,16
9,41
8,45
P/E
14,1
13,9
12,2
55,413
70,612
70,15
P/CE
12
10,5
9,5
EV/IC
2,4
2,8
2,7
IC, mln USD
239,58
210,71
214,44
127
RoIC
13,40%
15,52%
17,25%
455
452
RoIC/WACC
1,2
1,6
1,7
13354,25
13808,6
11,17%
9,70%
10,15%
Market value per share, USD
WACC
Assumptions: Equity at market value in 2012 is 452 mln USD Growth rate of invested capital (IC) = 1.77%
INTEGRITY
Sources: case materials, Central Bank of Russia, the team computations
Slide 13
6
Beta and WACC Calculation Appendix 3
1. Calculation of beta
beta = 1.565
where R – return Weekly observations N = 53
2. Calculation of cost of equity
CAPM where Rf – risk-free return
risk-free return
3,30%
market return
11,10%
beta
1,565
cost of equity
15,5%
3. Calculation of WACC WACC
INTEGRITY
11,51% weight
Cost
debt
71,8%
9,94%
equity
28,2%
15,5%
Date 20101101 20101108 20101115 20101122 20101129 20101206 20101213 20101220 20101227 20110110 … 20110912 20110919 20110926 20111003 20111010 20111017 20111024 20111031
Kalina share price Kalina return 670 7,7% 700,46 4,5% 748,99 6,9% 747 -0,3% 770 3,1% 775 0,6% 867 11,9% 908 4,7% 870,01 -4,2% 880,14 1,2% … … 1410 -2,6% 1253,6 -11,1% 1800 43,6% 2250 25,0% 3077,2 36,8% 3608 17,2% 3620 0,3% 3675 1,5%
MICEX index 1540,11 1541,1 1556,8 1566,41 1649,56 1656,34 1666,84 1675,81 1687,99 1744,74 … 1511,5 1327,19 1366,54 1351,42 1431,92 1447,01 1526,57 1501,18
Market return 1,1% 0,1% 1,0% 0,6% 5,3% 0,4% 0,6% 0,5% 0,7% 3,4% … -0,4% -12,2% 3,0% -1,1% 6,0% 1,1% 5,5% -1,7%
Sources: Kalina annual report, Central Bank of Russia, finam.ru, the team computations, http://www.returndb.com (Oct-Nov 2011), http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2011
Slide 14
FCF model. Sensitivity Appendix 4
Sensitivity analysis [app.3 ] 800 EV value
2-factor analysis Perpetual growth 3.4% 3.2% 372.22 362.71 334.28 325.54 297.92 289.93 263.10 255.82 247.92 240.95 229.77 223.16 197.86 191.89
600
70% 90% Risk factor change
10.15% 9.15% 8.15% 7.15% 6.70% 6.15% 5.15%
400
NI growth
6
200
-90%
-70%
-50%
NI growth
-30%
0 -10%
Perpetual growth
10%
30%
50%
investment growth
3.0% 353.65 317.22 282.31 248.88 234.30 216.86 186.21
2.8% 345.00 309.28 275.05 242.26 227.96 210.86 180.79
2.6% 336.74 301.69 268.11 235.93 221.90 205.12 175.62
2.4% 328.84 294.44 261.47 229.89 216.11 199.63 170.67
2.2% 321.29 287.50 255.12 224.10 210.57 194.38 165.93
1-factor analysis NI growth EV value
-90% 80
-80% 107
-70% 135
-60% 165
-50% 196
-40% 228
-30% 262
-20% 297
-10% 334
0% 372
10% 412
20% 454
30% 498
40% 544
50% 591
60% 641
70% 693
80% 747
90% 803
Perpetual growth EV value
-90% 264
-80% 273
-70% 283
-60% 293
-50% 304
-40% 315
-30% 328
-20% 342
-10% 356
0% 372
10% 390
20% 408
30% 429
40% 452
50% 477
60% 505
70% 536
80% 572
90% 612
investment growth EV value
-90% 395
-80% 393
-70% 390
-60% 388
-50% 385
-40% 383
-30% 380
-20% 377
-10% 375
0% 372
10% 370
20% 367
30% 364
40% 361
50% 359
60% 356
70% 353
80% 350
90% 347
EV sensitivity to 1% change NI growth
1.48%
INTEGRITY
Perpetual growth
0.46%
Investment growth
Sources: case materials, Central Bank of Russia, the team computations
-0.07%
Slide 15
6
SYNERGY EFFECTS Appendix 5
1. Feedstock&packaging packaging costs reduction % reduction, mln RUR
4.73 47.274 <= annual report kalina 9.5% <= Unilever sustainable living plan 4.2774
2. Synergy in media buying advertising budget, bln RUR Unilever Kalina
484.560 2011 discount 3.838 8% 2.219
3. Administrative costs reduction of emploees in headquaters average monthly salary in the city IT & Finance premium total cost reduction , RUR mln
4. Transportation & storage transportation costs, RUR mln reduction % reduction, mln RUR warehouse costs reduction % reduction, mln RUR
INTEGRITY
140 27000 80%
<= rbk.tv
81.648 <= case mat inf portal ekb ural busin ess consulting
81.648
251.488 502.975 <= annual report kalina 50% <= team estimation 251.4875 120.938 <= annual report kalina 0 <= utilization rate is close to 100% 0
Sources: case materials, annual report Kalina, rbk.tv, Unliever,
5. Reduction of sales costs sales personnel kalina employees
260
controling specialists
60
outsorced staff 1300 Total costs reduction RUR mln
19.44 reduce monthly salary 2100 <= all controlling 0 0 functions 2700 transferred to 60 0 Unilever 2700 0 0 19.440
6. Improvement of distribution platform 542.48 structure of sales by Kalina Kalina, per POS, distr chanels structure mln RUR mln RUR beauty care shops 51,40% supermarkets and 30,80% 72,64% 8479,14 0,2228 hypermarkets superettes 4% 9,43% 1101,19 pharmacies 7,60% 17,92% 2092,26 0,2989 open-space markets 6,20% sales unilever, mln RUR 19203,29 profitability unilever 14,80% sales Kalina, mln RUR 11672,59 increase in sales of Unilever, mln RUR 3665,39 Increased profits for Unliver, mln RUR 542,48 Slide 16
6
Stock Purchase Appendix 6
Buyer Shareholders
Target Shareholders
Buyer Shareholders
Buyer Buyer
INTEGRITY
Target
Sources: M&A. A step by step legal and practical guide. Edwin L. Miller Jr.
Target
Slide 17
6
ACQUISITION STRATEGY Appendix 7
Evaluation of potential sellers of Kalina shares (July 2011) Ownership interest
INTEGRITY
Type of investor
Period of presence within owners
Prego Holdings Limited
37.68%
institutional
Since 2010
VTB Capital
16.60%
institutional
Since 2010
Deutsche Bank Trust Company Americas
12.08%
institutional
Before 2010
Renaissance Securities (Cyprus) Limited
8.35%
institutional
Before 2010
JP Morgan Russian Securities PLC
5.88%
institutional
Before 2010
Other owners
19.41%
minority interest
Free circulation, minority interest
Sources: case materials,
ď&#x192;ź 80.59% could be acquired: the terms of acquisition could be negotiated with institutional investors ď&#x192;ź Remaining shares could be gradually bought out from minority shareholders
Slide 18
6
TAX CONSEQUENCES Appendix 8
Buyer (Unilever) Occasion
Income Tax
The Buyer does not have to pay any income tax in a share-purchase deal.
VAT
No VAT
Net operating loss carryover
Target (Concern Kalina) Occasion
Solution/ Consequences However, the price paid for the shares will be taken into account later on in case the Buyer would decide to sell these shares
“Capital gains tax”
If the Target has substantial net operating loss (NOL) carryovers…
…a transaction could be structured such as no tax is paid at the corporate level because gain is offset by the NOL
The Target’s shareholders will recognize taxable income on the sale of shares and will have to pay the income tax.
VAT
No VAT
Target’s tax liabilities
The Buyer will assume all the Target’s potential liabilities before tax authorities.
To mitigate these risks the deal should be structured in a way so that in case of any tax claim, the Buyer will be reimbursed
Goodwill
Under Russian accounting standards, companies are allowed to write off intangible assets, including goodwill.
So the Buyer would be able to write off the difference between the price paid for the shares and net assets value.
INTEGRITY
Sources: M&A. A step by step legal and practical guide. Edwin L. Miller Jr., Tax Code, team evaluation
Solution/ Consequences For this reason, the Target’s shareholders would be willing to reflect the amount of tax in the purchase price
Slide 19