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
6
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%
8
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
9
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