BD_CLR2013_Unilever_Sublime

Discussion materials on the possible purchase of Kalina

Cup Russia 2013

Alexander Kravchenko Svetlana Krechetova George Nichkov Alexander Ovsepyan

Rationale

Timing and risks

Valuation

Unilever should focus on improving its position on the personal care market Russian personal care segment is the largest and fastest growing business of Unilever, yet its growth is outpaced by the market Unilever’s business segmentation in Russia by volume, 2010, %

Growth of Unilever Businesses, in Russia 2010, %

Russian personal care market shares, 2010, %

10% 0% Refreshments 19%

Homecare 18%

10%

20%

9.1% 8%

Henkel Unrealized growth potential

6%

19.9%

L'Oreal

14.2%

4.4% 4% P&G

13.5%

2.2%

2% 1.2% Foods 30%

1.4%

Personal Care 33%

Unilever

10.2%

-9.7%

0% Foods

Refreshments

Homecare

Personal Care

Overall market growth

Unilever needs to catch up with its competitors on a large and fast growing market

Source: case data, Sublime analysis

2

Rationale

Timing and risks

Valuation

Acquisition of Kalina is the best option to substantiate growth on the personal care market Barriers to organic growth leaves M&A the only reasonable option to grow Market is highly-consolidated • High market consolidation

Market is well-penetrated

Players’ market shares, 2011, %

Penetration of personal care products, 2010, % 95%

Organic growth in lucrative segment is costy Customer segmentation in personal care market Age

88%

85%

Others Average – 72%

75%

30%

15%

14%

55%

51%

20%

Younger

6% 14% 6% 10%

45%

55%

30

66%

65%

10%

Older

20%

Low

Top-6

High

Pricesensitivity

~ Steps to enter new segments: • Develop a new product line • Launch supporting marketing campaign

I. Shampoo, II. Shower III. Hair color, face care, gels, hair care styling deodorants (not shampoo)

Acquisition of Kalina enables us to gain the 2nd position on the personal care market Market segment

Deodorants

Shower Gels

Leading players

38% Unilever

20%

14% 13%

Beiersdorf Palmolive

10% P&G

15% 14%

Palmolive Unilever Beiersdorf

Hair care 21% 17%

Face Care

Palmolive Henkel

Postacquisition share Unilever rank

38%

1

2

2

3

1

<5

Kalina

14%

L’Oreal

13%

P&G

13%

P&G

10% Unilever

7% Splat

6% Kalina

14%

30%

1

Henkel

14%

7% NK

3% Beier

23%

15%

1

15% L’Oreal

5% Svoboda

11% Kalina

20%

35% Colgate

7% NK

12% Unilever 12% L’Oreal

13% Henkel

30% Kalina

Overall market

Oral care

–

16%

2

4

2

Source: case data, Sublime analysis

3

Rationale

Timing and risks

Valuation

Implied valuation range for the transaction bid spans from USD 634 to 827 M, and it is advisable not to go beyond USD 800 M Floor and ceiling for bid are USD 634 and 827 M

The standalone value of Kalina derived from 4 metrics averages USD 634 M DCF Analysis, USD M WACC & Perpetual growth

1

827

Comparable companies 2a

2013E, 2012E, 2011E Earnings

2b

2013E, 2012E, 2011E Sales

2c

2013E, 2012E, 2011E EBITDA

193

634 300

400

500

600

700

800

900

Synergies amount to USD 193 M Category

Expense

Revenue Financial One-off

Description •

Purchases of feedstock & packaging

•

Media buying

•

WC turnover

•

Administrative & sales costs

•

Logistics

•

Distribution platform

•

Change of capital structure

Time lag

Recurrence

Achievability

CF effect, USD M

59 Standalone

35 11

Combined value

Bid range

7

 

Synergies

•

Due to our bargaining power we are in a position to make a bid in the lower part of the range

•

As not all synergies can be secured, we advise Unilever not to go beyond USD 800 M

4 12 65

Continuing

Source: case data, Sublime analysis

4

Rationale

Valuation

Timing and risks

Acquiring Kalina right now we will get us the best possible price and face risks that can be contained To get the best price we need to proceed with a deal as soon as possible Russian M&A Market

The M&A process is prone to a number of risks, but they are manageable and can be mitigated

688

700

120

600

100 375

80

394

500 400

200 63.6

154.9

122.4

46.8

77.5

71.1

2006

2007

2008

2009

2010

2011

0

100

I phase of the new cycle

Typical purchase premium 50-100%

1 3

9

10-18%

4 low

0

IV phase of the previous cycle

7 10

300

214

40 20

2

800

140

60

5

900

medium

160

6

low

817

# of transactions

Significance

180

Volume, USD BN 867

Risk Evaluation Matrix high

M&A boom cycles in Russia

Pre M&A

medium

high

Probability Post M&A

1 Competitors move for

5

Important employees leave Kalina

2 Shareholders are unwilling

6

Integration failure

3 Strong reaction from our

7

Governmental policies

8

Distributors refuse to continue cooperation Macro-economic downturn

Kalina to sell

competitors

Number of bid rounds

8

4 Legal complications

9 More

Less

Effects of mitigating measures

10 Increasing pressure from

multinational competitors

Source: Case Data, Sublime analysis

5

Our team

Sublime: an experienced team of professionals with diverse backgrounds who enjoy solving problems for you

Alexander Ovsepyan

George Nichkov

Alexander Kravchenko

Svetlana Krechetova

hovsepyan.hse@gmail.com +7 916 637 8910

george.nichkov@gmail.com +7 903 976 6643

alexandre.kravchenko@hotmail.com +7 916 383 0415

svetakrechetova@gmail.com +7 910 405 0359

HSE’14, ICEF / Economics

Financial University’13 / UCL’13 / Finance and Credit • Finalist of the business case game BNP Paribas Ace Manager 4, 2012 • Holder of the President of the Russian Federation scholarship

LSE’14 / BSc Politics and Philosophy

MESI’13, Economics and Finance / Statistics

• Semi-finalist, McKinsey Business diving’13 • Participant , KPMG K-Practika’12 • Holder of Alpha-chance scholarship

• President of the Russian Society at the LSE • Finalist, Oliver Wyman Case Study Competition’12

• Finalist , Technical Cup 2012 • Semi-finalist , MedXpoint (2013) Case and SVAO Cup Case (2012) • Chairman , MESI Student Scientific Society

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Appendix

Cup Russia 2013

Alexander Kravchenko Alexander Ovsepyan George Nichkov Svetlana Krechetova

Appendix A: DCF Analysis of Kalina

• • • • • •

Russia country risk-premium is 1.5% Unlevered beta is taken from the samples of similar companies and equals to 0.73 Cost of debt is the average of loans’ rates of Kalina for the past 2 years Perpetual sales growth rate is 3% The company stabilizes its operations by the end of 2013 EBITDA, D&A, change in NWC and CapEx are forecasted as % of Sales

WACC Cost of equity (Ke) US risk-free rate Russia country risk premium Russia risk-fee rate Russian market risk premium Unlevered beta Target net debt / equity Levered beta Cost of debt (Kd) Post-tax cost of debt Equity as % of total capital structure WACC

Source: case data, Sublime analysis

15.3% 3.4% 1.5% 4.9% 7.3% 0.73 120.0% 1.43 10.0% 8.0% 45.5% 12.4%

Value Terminal cash flow Perpetual growth rate Terminal value (TV) Discounted TV Cumulative Present Value of FCF Enterprise value (EV) Net debt Minority interests Equity value, USD K RUB M Sales Sales growth EBITDA EBITDA margin EBIT EBIT margin Theoretical taxes NOPAT Plus: D&A D&A as % of Sales Less: Increase in NWC As % of change of Sales Less: CapEx CapEx as % of Sales FCF, RUB K FCF, USD K WACC Discount year Discount factor FCF post discount

Sensitivity analysis of Enterprise Value 61 3% 648 430 91 521 122 0 399

WACC 521 10.4% 11.4% 12.4% 13.4% 14.4% Perpetual growth

ASSUMPTIONS

2.0%

601

532

476

430

391

2.5%

636

559

497

447

406

3.0%

676

589

521

467

422

3.5%

722

624

548

488

439

4.0%

775

663

578

512

458

2010 11,674

20.0%

1,907 16.3% 1,510 12.9% 302 1,208 397 3.4% 258 17.2% 532 4.6% 815 27

2011 13,249 13.5% 1,882 14.2% 1,659 12.5% 332 1,327 223 1.7% 315 20.0% 662 5.0% 573 19

2012 13,863 4.6% 2,090 15.1% 1,744 12.6% 349 1,395 347 2.5% 92 15.0% 832 6.0% 818 27

2013 14,695 6.0% 2,498 17.0% 2,204 15.0% 441 1,763 294 2.0% 50 6.0% 588 4.0% 1,420 45

0.5 0.94 25

1.5 0.84 16

2.5 0.75 20

3.5 0.66 30

FY 15,135 3.0% 2,724 18.0% 2,452 16.2% 490 1,962 272 1.8% -13 -3.0% 272 1.8% 1,975 61

12.4%

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Appendix B: Comparable companies analysis ASSUMPTIONS • • •

•

Sample comparable companies include 8 firms form developed market and 3 from developing world Companies with MC of more than USD 20 K are ruled out as too large for Kalina The choice of EBITDA margin and EV/Sales for 2013 is justified by the fact that Kalina will stabilize its operations by that time and the significant correlation between these indicators All multiples are weighted against market capitalization of corresponding firms

Linear regression EV/Sales 2.5 2 1.5 y = 7.81x - 0.1009 R² = 0.7873

1 0.5

EBITDA margin

0 0.08

0.13

0.18

0.23

0.28

Sample companies Developed markets • Beiersdorf • Avon Products • Shiseido • Oriflame • Fancl • Sarantis (Greece) • Revlon • Elizabeth Arden

Kalina value, USD M EBITDA margin EV/Sales Sales EV

Developing markets • Natura Cosmeticos (Brazil) • Hypermarcas • Colgate-Palmolive (India)

USD M Multiples Kalina's indicators (net profit, EBITDA, Sales) Net debt EV

2011E 20.41

P/E 2012E 17.78

2013E 15.63

32.7 122.0 789.3

37.0 122.0 779.8

40.6 122.0 757.1

2013 17% 1.33 466 620

EV/EBITDA 2011E 2012E 2013E 10.16 9.15 7.84

EV/Income 2011E 2012E 2013E 1.67 1.54 1.31

62.7

68.5

79.2

384.4

434.2

454.3

637.0

626.7

620.7

641.0

669.2

593.7

Source: case data, Sublime analysis

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Appendix C: Evaluation of synergies from acquisition ASSUMPTIONS • •

• • • • •

Synergies will be exercised during two years following the acquisition They are estimated as a difference between the EV of Kalina before the takeover and the EV of Kalina after it calculated based on DCF model explored in Appendix A These synergies account for the incremental improvements in operating results obtained on both sides: Unilever and Kalina Offsets are incorporated into the model Increase in sales cause also increase of all other expense items that are projected as % of sales Company is expected to reach a stabilized level of production by 2014 Synergies are measured by the increase of cash flows associated with its particular type

# Synergy Purchases of feedstock and 1 packaging 2 Media buying

Type

Realtion to volume Influence on financial model by years

Expense

Volume related

Expense

Volume related

3 WC turnover

Expense

4 Administrative and sales costs 5 Logistics 6 Distribution platform

Expense Expense Revenue

7 Change of capital structure

Financial

Decrease in COGS by 5%

Reduction in SG&A (advertising) Substantial decrease of WC as % of change Volume related of Sales in first years Non-volume related Reduction in SG&A (administrative costs) Non-volume related Reduction in SG&A (distribution expenses) Additional boost of sales growth Reduction in cost of debt by 1%, reduction of debt burden until the Unilever D/E level

2012

2013

FY

-5.0%

-5.0%

-4.0%

-16.7%

-16.7%

-16.7%

-30.0%

-40.0%

-1.0%

-3.4% -0.0% +0.4%

-3.4% -4.0% +2.0%

-3.4% -4.0% +0.0%

-

-

-

Pre-tax cost of debt: -1%, Target net D/E: -35%

Source: case data, Sublime analysis

10