Полуфинал mindstream

Cup Russia 2013

Recommendations of Corporate finance department concerning possible acquisition of “Kalina� concern

MindStream Prepared by

Eliseeva Tatyana Kohlsdorf Daniel Kokareva Ekaterina Molodina Elena

We recommend to proceed with Kalina acquisition negotiations The estimated bid price is 19,5 bln RUR The value of standalone Kalina business is 16,3 bln RUR The value of Kalina business with account for synergies is 26,5 bln RUR

Future benefits of integration • The deal meets Unilever’s goal of boosting it’s personal care-unit (fastest growing category) • Dominant market shares in the Russian personal-care market (of 9,6 bln euro) • Possible reduction of costs by as much as 30 million euros after the acquisition • Doubling of existing portfolio (to 540 mln euro) • Increase in sales due to combination of well-organized modern and traditional trade channels

Russian market and Kalina are projected to grow in medium term, there for it is advisably to acquire the target Source: case data, company data, team estimates

The risks of acquisition is considered to minor and could be eliminated by integration itself

Russian beauty and personal care market demonstrates robust growth Russian personal care market

•

Henkel L'Oreal

6,2%

10,2%

• •

P&G

6,0%

Unilever Beiersdorf

13,5%

9,0% 12,0%

30,0%

14,2%

9,0%

Kalina Middle-level international Middle-level Russian

19,9%

Minor local players

…is characterized by high level of concentration Value share 2011, market growth (%) October

September

0,1 0,19 0,13

The Russian Beauty and Personal Care market is far to be saturated and is expected to increase a 4% value annual growth rate in the upcoming 4 years (2011-2015).

Entry of various segments in Russia, % Styling products

Shampoo+C onditioner

47

Hair colors

H&B

0,12 0,07 0,06

The largest market in Western Europe and 8th largest in the world 9,6 billion Euro in 2010 (+6,9%) +9,1% in value and +5,9% in volume (Q1 2011)

55

Hair care products

60

Shower gels

Face care

72

Antiperspirants -1,2 August

Facial care

0,2

10,8 -1,5

-0,5

0,5

81

1,5

2,5

3,5

4,5

The face care segment shows stable growth as well as H&B, shampoos segment is slowly recovering from sluggish august Source: case data, Euromonitor International

85

Shampoos

99 0

20

40

60

80

100

There is no opportunity to grow through extension of new segments in Russia

"Kalina" has become one of the most dynamic companies in the Russian consumer market.

The competitive environment in the major markets 80

Kalina is present in • Russia, • CIS countries, • Europe

17,8 bln RUR

70 60 50

40 30 20 10

26,4 bln RUR

F a c i a l c a r e

Nevskaya kosmetica 6,8

Svoboda 5 L'Oreal 14,1 Kalina 30,4

0

Kalina 10,9

L'Oreal 12,2 Unilever 12,3 Henkel 17,2 P&G 21,2

S h a m p o o s

Ukraine, Kazakhstan and Belarus account for about 70% of non-domestic sales

Kalina concern takes up lion’s share of Russian facial care products market and is in line with Unilever share in shampoos segment

Decomposition of sales by brand 100% others

Oral care products market

80% 60% 40% 20% 0%

29 10 12 14

Hair care products market

7,7%

10,9%

Facial skin care products market

35

Source: case data, company data, team estimates

Hand and body skin care products market

Kalina

30,4%

Others

35,6%

Although “Kalina” is quite an attractive asset there are some risks peculiar to it

Company image

Production quality

Price policy

Broadening of assortement

Improvement of distribution processes

Marketing actions

Other

11%

16%

19%

13%

15%

23%

"Kalina" business activity risks’ map High

Increasing competition from the multinational corporations

Moderate

Negative changes in economic situation in Russia and CIS Changes in Negative consumer changes in preferences legislation in Russia and CIS

Low

Dependence on dealers and retail buyers in distribution processes may lead to decline in turnover and competitiveness of the company

Impact of various factors on Company’s competitiveness

Risk Likelihood

Unilever should take into consideration the following risks: • Inability to achieve the synergies and value creation contemplated by the transaction • Failure to promptly and effectively integrate the businesses of “Kalina” concern and Unilever • Extra costs created by integration processes • “Kalina” won’t be able to show the projected growth of sales and revenue

Low

Moderate

Risk Impact Source: case data, company data, team estimates

High

3%

The weak factors concerning lower marketing costs and innovation comparing to the international competitors can be easily eliminated by the future integration with Unilever • • • •

• • •

•

• •

broad distribution network high and consistent quality of goods and services active advertizing policy the brands of the Concern have high awareness indicators Russian consumers find local products more natural lower price and maintaining the quality level at world standards proximity to the consumer, which allows to collect specific consumption data, and to react promptly to changes own Research Center in Yekaterinburg

•

target consumer group will be growing together with the wellbeing of the nation market growth in nominal and in money terms

•

•

• •

• •

•

low level of innovation in comparison with international competitors specialized Retail: leading retail chains such as "Arbat Prestige" and "L'Etoile" prefer to work with multinational brands. growing domestic consumer loyalty to foreign brands. marketing costs of international competitors are much higher

increasing competition from the multinational corporations, changes in consumer preferences, changes in taxation, currency and customs regulations of the countries of destination for Concern’s products export. changes in currency rates, inflation and interest rates.

Source: case data, company data, team estimates

After purchase some weaknesses of Kalina will be eliminated: • Kalina will get access to development of Unilever • Growing loyalty to foreign house of brands Unilever • Possibility to get access to specialized retail

The standalone enterprise value of Kalina can be calculated with DCF valuation model mln RUR

2011

2012

2013

2014

2015

EBIT

1503

1704

1863

2010

2112

Add: Depreciation

324

342

366

390

414

Less: Taxes

276

324

372

417

447

Less: Capex

453

480

462

441

408

Less: Change in Working Capital

66

153

180

216

213

FCFF

1032

1089

1215

1326

1458

Cost of Debt

10%

Beta

2.4

Risk free rate

7.0%

Standard risk premium

5.0%

Specific company premium

2.0%

Cost of equity

21.1%

Share of debt

63.9%

Share of equity

36.1%

WACC

12.7%

Terminal Value

9,954 bln RUR

Fair EV

16,263 bln RUR

Taking into account the synergies listed we calculated the final Kalina price RUR'000

2011

2012

2013

2014

2015

Synergy in purchases of feedstock and packaging Costs

0

0

0

0

0

Gains

197887

413992

453338

479842

504316

Synergy in media buying Costs

0

0

0

0

0

Gains

50000

104790

114970

122156

129341

Synergy in transportation and storage Costs

46400

80000

0

0

0

Planning combined logistics network

6400

0

0

0

0

Realizing plan

40000

80000

0

0

0

Gains

91927

193051

212191

225701

239211

Syergy in administrative costs Costs

2000

14600

4800

0

0

Gains

0

8200

8200

8200

8200

Synergy in reduction of sales costs Costs

90000

180000

0

0

0

Gains

225000

450000

450000

450000

450000

Synergy in improvement of distribution platform Costs

0

0

0

0

0

Gains

659623

1379973

1511126

1599473

1681053

Synergy inusage of Unilever know-how in Kalina production Costs

2500

0

0

0

0

Gains

129880

272858

329811

344993

377782

Added 10,253 synergies bln PV RUR

MindStream will solve any problem

• Team Kohlsdorf Daniel Eliseeva Tatyana Moscow MSU Faculty of economics Master degree in 2014 eliseeva.tatyana91@gmail.com +7-915-359-42-13

Munich TUM Faculty of economics Master degree in 2014 +49-175-937-37-32

Molodina Elena Kokareva Ekaterina Moscow MSU Faculty of economics Master degree in 2014 kokareva.e@gmail.com +7-916-931-21-48

Moscow MSU Faculty of economics Master degree in 2014 elenamolodina@yahoo.com +7-985-310-28-00

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