UNILEVER M&A: «KALINA KRASNAYA»
Artem Aleksandrov Dmitriy Bazarov Ara Kosyan Nataliya Menskaya
MACROECONOMIC OVERVIEW GDP 3.6% GDP growth expected in 2011 Domestic demand as the main driver of GDP growth
Oil prices
Labor market
Money market
Lending
Trends
M2 increase up to 22%
Growth of loans to private and corporate borrowers
4.6% increase in retail turnover
Employment recovery lags behind economic growth
Further stabilization of M2
>7% increase of loans expected in 2011
Growth of household consumption (>4.1%)
4.1% growth of real income in 2011
Moderate increase of CBR rates
4.3% expected global GDP growth rate
unemployment
Steady increase of oil price up to 75 USD/barrel in 2011 83-86 USD/ barrel oil price in 2012-2013
7.5%
in 2011
Source: Sberbank CMR
Investments into fixed assets 7% increase
RUSSIAN BEAUTY AND PERSONAL CARE MARKET Growth
• Headline growth rate of 13-14% in 2010-15 • Personal care sales could reach $19.5 bln in 2015
MNCs
• Multinational companies (MNCs) are expected to increase their market share • MNCs move to localizing production • High market concentration
Trends
• Fast growth in higher value-added segments • Sophistication of product line and shift towards high-quality products • Market consolidation
Market segmentation 12,00%
19,90%
9,00% 6,20%
14,20%
6,00% 10,20%
13,50%
Henkel
L'Oreal
P&G
Unilever
Beiersdorf
Kalina
Middle-level companies
Local players
Source: McKinsey Consumer and Shopper Insights 2011
WHY KALINA IS A GOOD TARGET? Unilever post-merger market share
PV of synergies 3000 mln RUB
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
2000 1000 0 Logistic synergy
Pre-Merger Unilever market share
Advertising and Workforce Packaging reduction Synergy Synergy
Pre-merger Kalina market share
Growth
Diversification
Potential
New presence
Low risk
Investment in a strategic category for Unilever
New target consumers aged over 30
Kalina annual growth rate is 13%
13% of oral care market
75% probability of postmerger integration
Powerful boost for organic growth
Loyal audience
2.2% annual growth of Beauty & Personal Care market
35% of face care market
High-quality management team
Vast distribution network
New high-quality products
Low-price segment
Best practices of corporate governance
Leadership in hair care, skin care and face care
No fierce competition with L’Oreal or P&G
Innovation formulas intellectual property
Business homogeneity
KALINA VALUATION - MULTIPLES METHOD Big Companies in Developed Markets
Big Companies in Emerging Markets
Comparable Companies in Developed Markets
Comparable Companies in Emerging Markets
• • • • • • • •
•
• Ales Groupe • Elizabeth Arden • Revlon • Sarantis • Ulric de Varens SA • Interparfums SA • Jacques Bogart SA • Fancl
• Marico Ltd. • Gilette India • Emami Ltd • Godrej Consumer Products • Dabur India • Verofarm • 36.6
Procter and Gamble Unilever L'Oreal Colgate Palmolive Beirsdorf Avon Shiseido Oriflame
• •
Comparable Companies Selection Criteria
Natura Cosmeticos Hypermarcas ColgatePalmolive
• < 1 bln Market Capitalization • < 1 bln revenue • Comparable capital structure • Personal Care and Beauty Sector • Wide range of products
Kalina Value*: 21-26 bln RUB Multiples
• P/E • EV/EBITDA * See Appendix 1 for further details
KALINA VALUATION â&#x20AC;&#x201C; DCF MODEL
WACC: 11.65% Annual EBITDA margin: 15.26% Annual Depreciation and Amortization margin: 2.03%
FCF present Value: 3038.1 mln RUB
EV/EBITDA multiple: 14-16
Kalina Value*: 21.3-27.4 bln RUB
Effective annualized tax rate: 31.69% Net change in Operational Assets and Liabilities annualized margin: 3.5%
CapEx annualized margin: 3.58%
Year
2010
2011E
2012E
2013E
2014E
2015E
2016E
(mln RUB)
12776 13579
14378
15163
15924
16649
17409
FCF
509
573
605
635
664
694
Revenue
(mln RUB)
541
See Appendix
TRANSPORT SYNERGY In this section we analyze cost and risk reduction synergy produced by a supply chain integration of Unilever and Kalina. By integrating chains we mean linking warehouses and distribution centers and managing both Unilever and Kalina shipping simultaneously. We use Mean-Variance approach and solve non-linear optimization problem without loss of generality to analyze required investment, expected cost and risk reductions. Here we also consider that it takes 2 years to increase storage capacities of warehouses and rearrange the whole network, which is required for integration. We also consider that merging operational units results in a significant risk reduction. Transport synergy is to have an enormous impact on operational efficiency of Kalina because it now accounts for 20% of Kalina success.
4%-8% Expected Costs Reduction 52-105 mln RUB to integrate networks
Logistic and Distribution Networks Integration Synergies 412-825 mln RUB of total savings
0 Net effect: 359-719 mln RUB
Operation savings: 130 mln RUB
40 20
Transport Synergy 32%-35% absolute risk synergy
60
-20
2010
2011
2012
2013
2014
2015
2016
-40 -60 Logistic Network Integration Savings
Operational Efficiency Savings
Source: Kalina Quarter Report 2011, "Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integrationâ&#x20AC;&#x153; by Zugang Liu and Anna Nagurney
REVENUE SYNERGY Post-merger Unilever sales in Russia (mln RUB)
• After the merger Unilever will increase its market share in Russia. Thus Unilever can use its increased monopoly power on the market to increase the product price. • Based on the research the price could increased by 8,7%. • The synergetic effect will last only for 5 years, because of the market consolidation in the future
65000
55000
45000
35000
25000
15000 1
2
3
Synergy effect Pre-merger Unilever sales in Russia
4
5
Pre-merger Kalina sales
6
Present value of revenue synergy effect : 15057 mln RUB
Source: Euromonitor, The Guardian, Kalina data, Unilever data
COST SYNERGIES Merged company will gain bigger market share thus it will increase its bargaining power in negotiations with media agencies and feedstock suppliers.
Unilever and Kalina feedstock and packaging expenditures (mln RUB)
Unilever and Kalina advertising combined expenditures (mln RUB)
21000 20000
8000
19000
6000
18000
4000 2000
17000
0
16000 2010
2011
2012
2013
2014
2015
Unilever and Kalina feedstock and packaging expenditures
2010
2011
2012
2013
2014
2015
Unilever and Kalina advertising combined expenditures
Potential discount on feedstock, packaging and advertising budget will be up to 8% Net present value of production cost reduction would be 7128 mln RUB (using Unilever WACC as a discount rate) Source: Kalina Quarter Report 2011; “Proper Treatment of Buyer Power in Merger Review”, D.Carlton, M. Israel; “Merger Synergies along the Supply Chain”, G. Bernile, E. Lyandresy
WORKFORCE REDUCTION SYNERGY Efficiency Growth After Deal (%) 14 12 10 8 6 4 2 0 Year 1
Year 2
Year 3
Average
Year 4
Workforce reduction and administrative integration synergy has a number of positive effects due to the costs cut, efficiency increase and extra savings generated by reduced expenses on travel, computers and trainings. Recent trends in M&A deals lead us to conclusion that up number of employees who will be fired will vary from 7% up to 30%. During our analysis we developed three different strategies of workforce reduction. However, there are specific risks that are to be treated seriously.
Max
6000
Monetary benefits from workforce dismissal (USD’000) 5000 4000
Results
Risks
Effort
Savings: 3.2 mln USD
Most perspective employees leave
1 year to move workers
Develop workforce integration project
12% efficiency growth
Higher salary expectations
1-2 years to fully integrate within a new culture
Develop compensation strategy
Payback period reduction up to 10%
Unwillingness to move to another city
48 mln RUB costs
Leadership assignments, communication strategies
3000 2000 1000 0 15
20
30
Percentage of employees fired
Recommendations
Source: Belmakki Oualid, The Impact of Cultural Issues on M&A, Synergy Disclosures in Mergers and Acquisitions by Marie Dutordoir, Peter Roosenboom and Manuel Vasconcelos, Kommersant “Kalina Recipe”
APPENDIX
APPENDIX 1 - KALINA VALUE FIELD Company DCF Value Developed Markets Big Companies, Forward Year 2, EV/EBITDA Emerging Markets Big Companies, Forward Year 2, EV/EBITDA Developed Markets Peers, Forward Year 2, EV/EBITDA Emerging Markets Peers, Forward Year 2, EV/EBITDA Developed Markets Big Companies, Forward Year 1, EV/EBITDA Emerging Markets Big Companies, Forward Year 1, EV/EBITDA Developed Markets Peers, Forward Year 1, EV/EBITDA Emerging Markets Peers, Forward Year 1, EV/EBITDA Developed Markets Big Companies, Year 1, EV/EBITDA Emerging Markets Big Companies, Year 1, EV/EBITDA Developed Markets Peers, Year 1, EV/EBITDA Emerging Markets Peers, Year 1, EV/EBITDA Developed Markets Big Companies, Forward Year 2, P/E Emerging Markets Big Companies, Forward Year 2, P/E Developed Markets Peers, Forward Year 2, P/E Emerging Markets Peers, Forward Year 2, P/E Developed Markets Big Companies, Forward Year 1, P/E Emerging Markets Big Companies, Forward Year 1, P/E Developed Markets Peers, Forward Year 1, P/E Emerging Markets Peers, Forward Year 1, P/E Developed Markets Big Companies, Year 1, P/E Emerging Markets Big Companies, Year 1, P/E Developed Markets Peers, Year 1, P/E Emerging Markets Peers, Year 1, P/E 5000
15000
25000
35000
45000
55000
APPENDIX 2 – DCF MODEL INPUTS EBITDA margin calculation Year Margin (%) Annualized margin D/A margin Year Depreciation and Amortization Revenue D/A Margin Annualized margin Tax rate calculation Year Profit before taxes Tax expense (-) Effective Tax rate Effective annualized tax rate Change in Operating Asstes and Liabilities Year Operating Assets Operating Liabilities Net Change in Operating Asstes and Liabilities Revenue Net Change Margin Annualized Margin CapEx Year CapEx Revenue CapEx Margin Annualized Margin WACC (using CIG inputs) Risk free rate (%) Personal beauty market beta Equity premium WACC
Unit RUB 1000 RUB 1000
2010 16,3
RUB 1000 RUB 1000
2011 14,4 15,267
2012 15,1
2007 81970 10120845 0,008
2008 90165 12028752 0,007 0,020
2009 321587 10175129 0,032
2010 397011 11672588 0,034
2008 346910 115777 0,334
2009 622927 208204 0,334 0,317
2010 1311205 340165 0,259
2011 585081 199096 0,340
2006 4002853 3039195 -787391 9338700 -0,084
2007 5365453 4199563 202232 10120845 0,020 0,035
2008 6152531 5750105 -763464 12028752 -0,063
2009 6395536 5741211 251899 10175129 0,025
2010 8474992 4574290 3246377 11672588 0,278
2006 434188 9338700 0,046
2007 184596 10120845 0,018 0,036
2008 361560 12028752 0,030
2009 55052 10175129 0,005
2010 72112 11672588 0,006
RUB 1000 RUB 1000 RUB 1000
RUB 1000 RUB 1000 RUB 1000 RUB 1000
2005 4656404 2905355 x 8150535 x
2005 884343 8150535 0,109
5,7 0,85 7 11,65
APPENDIX 3 – DCF MODEL Year
2010
2011E
2012E
2013E
2014E
2015E
2016E
Face Care market share
%
35%
35%
36%
36%
36%
36%
2011-2016 Face Care sales CAGR
%
7,0%
6,5%
6,0%
5,5%
5,0%
5,0%
Hair Care market share
%
13%
13%
14%
14%
14%
14%
2011-2016 Hair Care sales CAGR
%
8,0%
7,5%
7,0%
6,5%
6,0%
6,0%
Body Care market share
%
36%
36%
36%
36%
37%
37%
2011-2016 Body Care sales CAGR
%
6,0%
5,5%
5,0%
4,5%
4,0%
4,0%
Mouth Care market share
%
11%
12%
12%
12%
12%
12%
2011-2016 Mouth Care sales CAGR
%
6,0%
5,5%
5,0%
4,5%
4,0%
4,0%
6,3%
5,9%
5,5%
5,0%
4,6%
4,6%
12776
13579
14378
15163
15924
16649
17409
EBITDA
1950
2072
2194
2314
2430
2541
2657
EBIT
1690
1796
1902
2006
2107
2203
2303
NOPAT
1155
1227
1299
1370
1439
1505
1573
NOPAT+Non-Cash Charges
1414
1503
1591
1678
1762
1843
1927
NOPAT+Non-Cash Charges-Change in Operating A&L
967
1028
1088
1147
1205
1260
1317
FCF
509
541
573
605
635
664
694
Kalina revenue growth (Weigthed average) Kalina Revenue
WACC(%) FCF PV
% mln RUB
11,65 3 038,11
Appendix 4 Macroeconomic forecast of CMR of Sberbank for 2011-2013
APPENDIX 5 - REVENUE SYNERGY
Units
2010 2011E
Unilever sales in Russia
mln EUR
750
-
mln RUB
31614
Unilever sales in Russia growth rate Kalina sales
%
2012E 2013E 2014E 2015E
32879 34194,1 35561,9 36984,3 38463,7
4%
mln RUB
12776
13579
14378
15163
15924
16649
mln RUB
44390
46458
48572
50725
52909
55113
%
8,7%
Merged company sales
mln RUB
44390
50499
52798
55138
57512
59907
Synergy effect
mln RUB
0
4042
4226
4413
4603
4795
Present value of revenue synergy
mln RUB
15057
Combined company sales Potential revenue increase due to synergy effect
Unilever WACC
%
10,07%
According to the research "Strategic buyers, horizontal mergers and synergies: An experimental investigation"; Douglas Davis, Bart Wilson; 2008, after the merger companies increase their market power what leads to price increase for about 8,7%. Thus we can analyse and calculate net present value of the revenue synergy for Unilever.
Source: Guardian, Kalina annual report 2010, team calculations
APPENDIX 6 - COST SYNERGY Feedstock and packaging expenditures Uniliver feedstock and packaging expenditures in Russia Unilever sales in Russia -
Units mln RUB mln EUR mln RUB
Kalina feedstock and packaging expenditures in Russia Feedstock and packaging expenditures margin Sales margin Kalina Sales
mln RUB % % mln RUB
Overall Unilever and Kalina feedstock and packaging expenditures in Russia Unilever and Kalina feedstock and packaging expenditures in Russia CAGR
mln RUB %
Advertising expenditures Unilever advertising budget USA 2010 Unilever sales in USA 2010 Advertising expenditures margin
mln USD mln USD %
2010 2011 2012 2013 2014 2015 12850 750 31614 4744 80,02% 96,87% 11672
17594 18122 18666 19226 19802 20397 3%
720 6725 11%
Unilever sales in Russia - Unilever advertising budget in Russia Unilever advertising budget in Russia CAGR
mln EUR mln RUB mln RUB %
750 31614 3385 3520 3661 3807 3960 4118 4%
Kalina advertising budget Kalina advertising budget growth rate Total advertising budget of Unilever and Kalina
mln RUB % mln RUB
2000 2500 2750 3025 3328 3660 10% 5385 6020 6411 6832 7287 7778
Total expenditures of Unilver and Kalina on advertising, feedstock and packaging Potential post-merger economy - Present value of potential economy Unilever WACC
mln RUB % mln RUB mln RUB %
22979 24142 25077 26058 27090 28175 8% 8% 8% 8% 8% 8% 0 1931 2006 2085 2167 2254 7128 10,07%
Source: Kalina annual report, Unilever advertising budget, Euromonitor, The Daily Telegraph.
APPENDIX 7 - TRANSPORT SYNERGY Unilever WACC (according to Stock Analysis On Net)
%
10,07
North America Analysis North America Transport Spending North America Unilever Division Sales Transport expenses share
mln USD mln USD %
250 10000 2,5
250 10000 2,5
250 10000 2,5
250 10000 2,5
250 10000 2,5
250 10000 2,5
250 10000 2,5
Synergy Saving Calculation Year Kalina Revenue Projection Transport Expenses Projection* Transport Expenses Reduction Amount Saved 2010-2016 savings PV Savings Growth rate Annual Growth Rate of Savings Terminal Value of Saving after 2016
mln RUB mln RUB % mln RUB mln RUB % x % mln RUB
2010 12776 479 4 4 100
2011 13579 509 4 16
2012 14378 539 4 22
2013 15163 569 4 23
2014 15924 597 4 24
2015 16649 624 4 25
2016 17409 653 4 26
325
32
5
5
5
5
Total PV of Savings (assuming 4% costs cut) Total PV of Savings (assuming 8% costs cut) Costs (to integrate networks, as a % of transport expenses) Total costs (4% saving network) Total costs (8% saving network) Net effect of integration (4% saving integration) Net effect of integration (8% saving integration)
mln RUB mln RUB % mln RUB mln RUB mln RUB mln RUB
5 505 413 825 11 53 105 360 720
4% cost reduction is obtained for a merger of supply chains consisting of two paths. Thus, merging more complex supply chains consisting of at least 4 paths (4 main distribution centers of Kalina, and even more for Unilever) enables to obtain up to 8% cost reduction. Merged supply chains also reduce risk (see Graphs for synergy effect on expected costs and risk). We also consider that integration of larger networks not only generates 8% savings, but also costs twice as much. Here we also consider that it takes 2 years to increase storage capacities of warehouses and rearrange the whole network, which is required for unification of networks. So, the project will be only 20% effective in the first year, and only 80% effective in the second year.
APPENDIX 8 - TRANSPORT SYNERGY Operational Effeciency Analysis Initial number of outsorced companies
100
Final number of outsorced companies
30
Concentration increase
%
233
Cost reduction
%
10
Unilever Sales in Russia
mln RUB
31028
Kalina Sales in Russia
mln RUB
10175
% added by Kalina sales to Unilever sales
%
33
Concentration increase
%
33
Cost reduction**
%
2
Sales costs
mln RUB
621
Cost Reduction due to operational efficiency
mln RUB
13
Total PV of savings ***
mln RUB
130
Total Year
2010
2011
2012
2013
2014
2015
2016
Annual total distribution savings due to integration
mln RUB
17
29
35
36
37
38
39
Operational Efficiency Savings
mln RUB
13
13
13
13
13
13
13
Logistic Network Integration Savings
mln RUB
-49
16
22
23
24
25
26
To calculate sales costs reduction we will use empirical examples of costs reduction due to a greater concentration of goods flow per every unit of workforce used in distribution. Our recommendation is to deliver and sale both Unilever and Kalina goods simultaneously (this requires unification of main distribution centers). This will result in greater consolidation and thus higher operational efficiency. Unilever North America division moved from 100 to 30 outsourced companies it used for transportation what resulted in a 10% expenses cut. We will use this consolidation example to evaluate how much can be saved on distribution synergy. We also assume 1.5 savings coefficient while comparing American and Russian experiences of transport costs reduction because of poor Russian road network.
APPENDIX 9 - TRANSPORT SYNERGY
SPUTNIK TEAM Dmitriy Bazarov 2 year student, HSE-NES Joint Undergraduate Program dbazarov@nes.ru +7 (903) 1104520 Artem Aleksandrov 2 year student, HSE-NES Joint Undergraduate Program aaleksandrov@nes.ru +7 (968) 9512479 Nataliya Menskaya 2 year student, HSE-NES Joint Undergraduate Program nmenskaya@nes.ru +7 (915) 4009327 Ara Kosyan 2 year student, HSE-NES Joint Undergraduate Program akosyan@nes.ru +7 (906) 0972589