UNILEVER
M&A: «KALINA KRASNAYA»
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/3 Introduction
/4 Unilever • Company History • Unilever Today
/7 Mergers and Acquisitions
/13 Personal Care Market • Market Snapshot • Unilever in Russian Market
• Theoretical aspects of mergers and acquisitions • Current situation inM&A market
/15 Concern «Kalina»
/21 Appendix
• Company History • Concern «Kalina» Today • Market Position of the Company • Possible Synergies
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unilever m&a case - Table of Contents
Introduction
1 The case describes course of events as of November 2011. Hereinafter “the current situation” means the situation as off November 2011. When using any additional materials, please make sure that these materials are dated November 2011 or earlier. 2 Modern trade – modern sales channels, such as chain stores, supermarkets and hypermarkets 3 Traditional trade – traditional sales channels – standalone, nonchain stores, and kiosks 4
Due diligence - an investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale. This includes reviewing all financial records plus anything else deemed material to the sale. 5 Price corridor, within which the deal may take place, and taking over another company may be profitable for the purchaser. 6 Stand alone – evaluation of business “as is”, disregarding possible synergies with the purchasing company
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November of 20111 turned out surprisingly warm and sunny. It was a rare year when in November morning you could walk to the office wearing a trench, feeling joy about colorful leaves and still blazing sun, instead of wrapping yourself in a coat and а neckpiece, carefully watching your step and going round deep puddles. Dmitry had no morning rush; he walked through the still half-occupied parking to the office of Unilever. Dmitry is the head of Corporate finance department, and today he has important news to tell his colleagues: following the general revival of mergers and acquisitions market last year Unilever is looking into new acquisitions in Russia. Provided the strategic goals of the company, business of developing personal care products is the most promising direction now. This segment is actively developing - the Russian market of home and personal care is estimated at 13 bln EUR and is among top-10 largest markets in the world. Moreover, personal care products account for about 75% of the market. The market grows at the average level of 6-7% per annum, and despite a minor slowdown in 2009, experts forecast annual growth rate of 5-10% in the medium term. Yesterday Dmitry was present at the meeting of investment committee, where the name of the target for possible acquisition was mentioned – “Kalina” group of companies, a major player in the Russian cosmetics market. This was the information Dmitry wanted to deliver to his colleagues. The Russian market of personal care products is relatively narrow, not offering a variety of potential takeover targets. The choice of “Kalina” as a potential target was influenced by several factors. Acquisition of such a big player is capable not only to substantially strengthen the Unilever product portfolio in the personal care market, but to give it a
qualitative shift. According to internal preliminary assessments, the acquisition of “Kalina” will more than double Unilever’s portfolio – from 225 to 540 mln. EUR. In addition to current leading position in deodorants segment (39% of the market), following the acquisition the company will receive a 23% share in facial care market (in monetary terms), and a 25% share in shampoos segment (in terms of volume). The merged portfolio will promote Unilever to the second position in personal care market (following P&G, and having a minor lead over L’Oreal). Entering the segment of personal care is seen as highly perspective for Unilever, taking into account that at the moment the company does not work in this segment of the Russian market and has a scarce representation in body care products segment (several products under Dove brand). The facial care market in Russia has not been consolidated yet, and a major share is occupied my small local players. A timely entering into this segment promotes a stronger position there and increases the possibility to retain a leading role in consolidating the segment further. Combining a strong position of Unilever in modern trade2 and a strong position of “Kalina” in traditional trade3 and in small towns will represent the best possible joint portfolio on the shelves of all store types throughout Russia. Furthermore, merger of the companies will provide a substantial economy of resources at the stage of supply, launching the products, organizing a marketing campaign, and will have a positive influence on internal business processes. All the abovementioned factors make “Kalina” an attractive target for acquisition in the Russian market. However, without a precise business appraisal it is hard to evaluate the attractiveness of purchasing “Kalina” as compared to other companies in
other markets. ”Kalina” is a very attractive asset in the Russian market, and other major international players also examine this company as a possible takeover target. Rumor has it that one of the players has even commissioned due diligence4 of the company. This is why in case of “Kalina” both the purchasing price and the proposed strategy of further integration into purchaser’s business are of vital importance. Within a week Dmitry and his colleagues from Corporate finance department will have to prepare materials for the meeting of Unilever top management with “Kalina” higher officials. The meeting will be dedicated to discussing the possible deal for Unilever to purchase the business of “Kalina”. The target of Corporate finance department is not only to produce the correct price bid5, but also to finally acknowledge if the merger is currently needed before the start of negotiations. Herewith, it is important to assess both the stand alone6 business and its price with account for possible value-boosting synergies. It is required to give substantial reasons for the obtained evaluation, and also to present recommendations, whether to purchase this company at that moment, with regard to macroeconomic situation and current trends in the market. Proceeding from the recommendations of Corporate finance department specialists, the top management of the company will shape their negotiating position accordingly, whether to facilitate the negotiation, or let the other party see that Unilever is not fully convinced that the merger is viable at that moment.
unilever m&a case - Introduction
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Unilever
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Company History The multinational Anglo-Dutch company was established in England in 1880, and its contemporary name appeared when Dutch Margarine Uni and Lever Brothers (British soap manufacturing company) merged in 1930. The reasons for merger were the multiple benefits gained in purchasing of raw materials – oils and fats required in manufacturing of both products. Thus the company started with larger merger, and throughout the history of Unilever development M&A7 transactions played a significant role. The current state of the company and the strategy of its development has been affected by a range of characteristic historical background features. First years of the company business coincided with the Great Depression in 1930s. These years were a period of trial for both Unilever and the entire world. The unfavorable economic conditions made the freshly united enterprise adapt and streamline as fast as possible. In the following years this furthered the creation of corporate methods of quick adaptation to the global changes and external economic factors. World War II became the second trial for the transnational company. Unilever was fragmented during the years of war. German and Japanese enterprises were located on occupied territories and any connections to London and Rotterdam were completely severed. This resulted in development of the distinct corporate culture: local Unilever companies started to operate with high level of independence and focused on particularities of local markets. The trait kept up till nowadays: group operational
management is split based on location of enterprises, and different brands are promoted on different markets. Geographical diversification of business makes it possible to acquire local companies and brands that are successful in the markets of Unilever presence (this strategy is impossible for many FMCG companies as their development strategies allow acquisition of global players and businesses only). The postwar European prosperity and growth of wealth stimulated with the European Community take-off resulting in consumer demand boom and growing living standards, which also influenced new Unilever strategy. The company starts to pay additional attention to perfection of process solutions and establishes R&D units. Eventually, Unilever expands and the products of the company gain in variety; innovations are implemented and new acquisitions are effected. Advertising units also evolve, as do affiliated marketing research and packing companies. By the beginning of 1980s Unilever becomes 26th largest company in the world. The company businesses included tropical plantations, cargo forwarding, manufacturing of plastics, packing materials, and a wide range of food, personal, care and household maintenance products. In 1990s the company changed the strategy abruptly: the strategy of brand portfolio diversification was replaced with the strategy of focusing on key products and best selling markets with high growth potential. By the end of 20th century Unilever decreased the number of marketed product categories from 50 to 13. At the same time, the company
launched first environmental efficiency programs. Unilever welcomed XXI century with the Path to Growth program. This new five-years strategy is aimed to further development of leading brands, improvement of production, and speeding up the company growth. Sweeping changes were introduced to the group range of marketable products: the company sold 140 various brands and focused on leading brands. Unilever Health Institute was established in the beginning of the century. The Institute is dedicated to R&D in food, health, and life energy. In 2004, Unilever adopted a new corporate mission. Its essence is formulated in just one word – Vitality. The new corporate mission statement is Add Vitality to Life. In November 2010 the company changes its global vision. New Unilever Sustainable Living Plan becomes the cornerstone of the corporate strategic management. The 10 years Plan outlines the most important environmental, economic and social goals that form the long term development strategy of the company and guide all employees in their activities.
Mergers and acquisitions
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unilever m&a case - about company
Unilever Today Unilever is one of the world leaders in production of FMCG goods. The company products are sold to more than 190 countries with 160 million consumers worldwide using a Unilever product on any given day. Lipton tea; Calve mayonnaise; Domestos and Cif cleaning range; Rexona, Sunsilk, Timotei, Dove, Axe grooming products – all these brands constitute but a small portion of Unilever range of products sold. Unilever products are broken down into 4 product categories: personal care products, household maintenance products, food products, and refreshment8. Personal care products category covers antiperspirants, skin care products, hair care products, and oral care products. This category includes Dove, Lux, Rexona, Sunsilk, Axe, Close Up, and other brands. Unilever household maintenance products category comprises softeners, washing powders and detergents, soaps, and dish washing and cleansing agents. In this respect famous brands are Omo, Surf, Comfort, Radiant, Cif, Domestos,and Sunlight. Food products segment consists of soups, sauces, snacks, mayonnaise, salad dressings, margarine, and spreads9. Wellknown brands in this category comprise Knorr, Blue Band, Rama, Hellmann’s and Amora.
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Beverages and ice-cream
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Food product based on vegetable and milk fat mix
Refreshment category entails icecream, tea-based cold beverages, weight loss products, and vitamin enriched staple food products sold in emerging markets. The category brands sold worldwide are Heartbrand, Lipton, Slim-Fast, Becel, and Flora. Unilever manages business operations broken down in three geographical segments: America, West Europe, and all other regions (Asia, Africa, Central and Eastern Europe). Unilever pays particular attention to emerging markets as they have been demonstrating the stable sales growth for over 20 years. Today their share in the company total turnover is over 40%. Unilever sales in 13 emerging countries are in excess of EUR 0.5 billion, and the sales growth in these countries outpaces the total corporate sales growth. The company focuses on implementing innovations and creating new products in all consumer segments. Unilever’s approach is that of open innovation10, which helps to source new ideas all over the world. In 2009 the company announced a new R&D Genesis program that provides for a longterm streamlining of new ideas. Thanks to the program, the innovational pyramid-shaped Lipton Yellow Label tea bags were introduced to the market recently. These unique formed bags preserve the taste of fresh tea leaves. Another successful product is Rexona for
Women deodorant that combats body odor even during active movements. The company has 6 research & development laboratories worldwide with over 6.000 employees. The high efficiency of R&D programs is proved with annual registration of 250 to 350 new patents in the corresponding industry fields. With its emphasis on innovation and ongoing update of product line, the company has the power to compete in fast-changing market and support its global leadership. The company brand portfolio embraces some of the well-known and topical brands in the world. 11 major Unilever trademarks are evaluated over USD 1 billion, e.g., Heartbrand, Knorr, and Dove. 17 other brands are worth EURO 0.5 billion and more. Among them are Lifebuoy, Signal, and Pond’s. Out of the remaining brands 34 more can be distinguished, such as Сlear vita ABE, Ben&Jerry’s, Sunlight with their value exceeding EURO 250 million. Unilever first entered Russian market in 1991, one year later (1992) the company established its first representative office in Moscow. The office started their business by importing foremost brands, such as Lux soap, OMO washing powder, Signal toothpaste, Impulse antiperspirant and Lipton tea. By investing into Russian unit, over time the company developed its own production of substantially all products domestically. In
March, 1998 the company acquired the ownership of Moscow Margarine Factory (MMZ), and in October, 2000 Unilever purchased Bestfoods Company being the owner of Knorr and Hellmann’s trademarks. As a result of this alliance, Russian Unilever had one more state-of-the-art production facility, a factory in Tula. In March, 2002 a tea-packing factory, build in Saint-Petersburg in the vicinity of “Severnoye Siyanie” plant, was officially open. In 2008 Unilever became 100% shareholder of Inmarko and anchored in Russian ice-cream market. Inmarko Company had a turnover of around RUR 170 million, about 4,500 full-time employees and 3 plants located in Novosibirsk, Omsk and Tula. In July, 2009 Unilever acquired “Baltimore” Company with its manufacturing facilities located in Kolpino, near Saint-Petersburg. Starting from late autumn 2012, production of all Russian ketchups, as well as Baltimore and Calve sauces, is planned to be relocated to a new Unilever food production complex in Tula. Kolpino plant will stop functioning. Such an approach will enable optimizing the production, supplies and will give maximum payback from business development investments.
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Open innovation (term suggested by professor H. Chesbrough) is a paradigm that assumes that firms can and should use external ideas as well as internal ideas
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unilever m&a case - about company
In 2011, Unilever owned 7 large Russian enterprises. Total volume of Company’s investments into Russian economy currently exceeds EURO 1 billion. The number of Company’s employees in Russia is about 7,000 people. Presently, the whole global company has a target to double its business volume with in-parallel decrease of environmental impact (including raw materials production, consumption and disposal) to guarantee the growing global demand for FMCG. Personal (beauty) care segment is not only the largest in Unilever business, but also the most fast-growing one: in 2010 it showed 4.2% growth (in contrast, homecare segment grew by 2.2%, foods segment by 1.2%, and refreshment segment by 1.4 %.) The segment growth is mainly secured by growing markets, which demonstrate a considerable increase of personal care products entry.
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Shares of different business segments in Unilever’s cumulative business volume, 2010
30%
foods
33%
personal care
19%
refreshment
18%
homecare
unilever m&a case - about company
Mergers and Acquisitions
Theoretical aspects of mergers and acquisitions In the framework of strategic planning any company faces the need to define its strategy (general, corporate, etc.), analyze the current situation (market, competitors, position in the market, strong and weak points of the company, internal resources) and identify the strategic goals – where the company wants to be, and what it needs to accomplish for that purpose. Strategic planning routine starts with defining the general strategy of the company and can be seen on picture 1. As a result of strategic planning the company defines whether it is necessary to horizontally or vertically integrate the business, to diversify or divest it. Another result of strategic planning may be defining the criteria for screening takeover targets. Mergers and Acquisitions (M&A) is a process of purchasing, selling, or consolidating companies with the purpose of increasing the cost of equity. M&A deals have a number of strategic alternatives. Firstly, the company needs to understand, if it opts for organic (using internal resources) or inorganic growth (using external growth factors). Within organic growth strategy the company has such alternatives as product innovation, geographic expansion, boosting effectiveness. Inorganic growth gives a wider variety of available options: M&A deals, forming strategic alliances, joint ventures, fractional ownership, entering into contracts with partners. All alternatives are represented in the chart below (picture 2).
pic. 1 main steps of M&A process Defining the strategy of the company (general, corporate, etc.) Analyzing the current situation (market, competitors, position in the market, strengths, weaknesses, opportunities, threats, internal resources and their use) Identifying the strategic goals – where the company wants to be, and what it needs to accomplish for that purpose; also what development alternatives the company has Defining the necessity for horizontal or vertical integration, business diversification, or divestment Defining the criteria for choosing takeover targets The strategy is chosen and approved by the Board of Directors Searching for and screening candidates for takeover
pic. 2 Organic and inorganic growth Product innovation Organic growth
Geographic expansion Boosting effectiveness
Growth M&A (purchasing companies) Strategic alliance Inorganic growth
Joint venture Fractional ownership Contracts with partners
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unilever m&a case - Mergers and Acquisitions
Provided that from all strategic alternatives the company chooses M&A, then the deal process begins. In theory, an M&A deal is viable if NPV11 of this deal is above zero. When making decision to start the deal it is also necessary to pay attention to such important factors as legal and tax consequences of the deal, operational and financial synergies, corporate governance, time factor (choosing the best time to carry out the deal), structuring the deal. The basis of mergers and acquisitions is transfer of corporate governance over the business concerned. There are numerous forms of deals: merger, acquisition, takeover, purchase of company, share buy-outs (LBO, MBO), unfriendly takeovers, recapitalization, etc. Each M&A deal to purchase a business consists of four basic stages: preparation and search for subject of the deal, contact and evaluation, due diligence and structuring, negotiations and closing the deal, integration. At the stage of preparation and searching the company defines its strategy and selection criteria for potential subjects (in line with the strategy). Then the company launches preliminary search and assessment of subjects entering into the so-called “long list”. On the basis of “long list” the company forms the “short list” with the most interesting subjects, with whom the purchaser is ready to start negotiating. The first stage ends with preparation of documents (letter and presentation).
The second stage of M&A deal starts either with a contract with a potential takeover target (without disclosing the buyer), or with formalizing the non-disclosure agreement. Then comes the planning, coordinating meetings, and collecting information. After that the company is assessed, with regard
to “strategic compatibility”, and the deal is preliminarily structured. The second stage ends with creating a non-binding offer or exclusivity agreement (the subject of takeover acknowledges negotiating the deal exclusively with the mentioned purchaser).
Pic. 3 M&A process Preparation
Contact and Evaluation
Due Diligence
Negotiations
Definition of goals and selling purposes
Communication with potential buyers
Analysis and eveluation of the subject
Preparing the purchase and sale contract
Company analysis
Confidentiality agreement
Financial and economic analysis
Negotiations between shareholders
Definition of selling/price range
Information sharing
Presentations for management and shareholders
Obtaining permission from regulatory authorities
Preparation of documents
Meeting with potential buyers
Final assessment and formalization of deal structure
Signing the deal contract
Long and short list of potential buyers
Collecting information and offers
Evaluation and signing the binding offer
Closing the deal and preparation for business integration
11 Net Present Value of the deal, i.e. normalized to current period cash flows, received from accomplishing the deal.
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unilever m&a case - Mergers and Acquisitions
After an exclusivity agreement (or a non-binding offer) is formalized, the third stage of deal begins with due diligence and structuring. At this stage the subject for takeover is thoroughly analyzed and evaluated (due diligence), meetings are conducted with the management and shareholders, and the final assessment and deal structure is formalized. This stage ends with signing the binding offer. The final stage of the deal proceeds with negotiations, closing the deal, and integration. At this stage there is a lot of work with legal documents: preparing the purchase and sale contract, and agreement between shareholders. This stage encompasses negotiations devoted to the final structure and documentation. It is also necessary to obtain permission from regulatory authorities, sign all documents, and close the deal. After the deal is closed the process of integrating the purchased business starts. It is important to understand that business acquisition process is totally different depending on whether the purchaser is an institutional investor, or a strategic investor. Varying approaches of institutional and strategic investors to purchasing companies mean that investors require different grounds for effectiveness of their proprietary investment. A strategic investor, who does not plan to quit the business in several years, is also not willing to invest provided the negative NPV of the deal, but when calculating NPV he takes into account the present effect from synergies.
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Difference in approaches of institutional and strategic investors
Institutional investor
Strategic investor
Share size (in % of charter capital)
Usually up to 25-50%
Up to 100%
Control
Usually, operational control is not necessary
Control is necessary from the beginning, or an opportunity to control the company in future Control through the Board of Directors and operational control
Control through the Board of Directors (sometimes also through CFO) Type of purchased shares (primary or secondary offering)
Usually primary offering (i.e. money come to the company)
Primary and secondary offerings
Deal structure (shares, promissory notes, options, etc.)
Depending on mandate (shares, shares + put, convertible debts, etc.)
Usually controlling stake + option on the remaining part
Syndication possibility
Usually yes
Usually no
Factors influencing the assessment of takeover target
Economic value Necessary value to achieve target profitability (20%-50%) Are usually not ready to pay for total up-side
Economic value Usually more than institutional investors are ready to pay
unilever m&a case - Mergers and Acquisitions
Current situation in M&A market The market traditionally witnesses a cyclical behavior of M&A deals. As a rule, activity increases in certain periods (wave of M&A, when many deals are closed at the same time), and then the market lives in a recession until the next wave. 2010 was an impressive year from the viewpoint of mergers and acquisitions, both in the global market, and in Russia. The deal volume in the global M&A market increased by 27%, while the Russian market demonstrated an even higher growth of almost 59%. This was conditioned by world market recovery after the global financial crisis of 2008-2009. Despite the fact that absolute figures have not returned to pre-
crisis level yet, the market demonstrates substantial growth. However, experts’ predictions for 2011 are currently quite conservative, as they are not sure that the market is able to recover fully, or after an active 2010 market dynamics will decline again. In the Russian market M&A deals, including major ones, are closed primarily between domestic companies. It indicates that interest of foreign investors towards purchasing Russian assets is still quite low. A liberal share of deals, including high-value transactions, is made between companies from the oil&gas sector, metallurgy and mining industry, reflecting the industry structure of Russian economy. Large volume
of Russian investment into foreign companies working in the field of social media and e-commerce was affected by one market player, and this situation cannot be perceived as a trend in Russian telecommunications and mass media sector. For the last four years Russian market of mergers and acquisitions has witnessed a much greater volatility, as compared to the global market. Decreasing activity in the domestic market in 2009 was far more serious, and though last year global deal volume is higher than 2006 level, the corresponding level in Russia is still below 50% in relation to 2006.
M&A deals by type
Internal Foreign assets purchased by Russian companies Russian assets purchased by foreign companies
Volume of Russian Mergers and Acquisitions Market, 2005-2011
Total value of deals, bln.USD
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Number of deals
Number of deals
Number of deals
Total value of deals, bln.USD
Total value of deals, bln.USD
Mergers and Acquisitions globally, 2005-2011
Total value of deals, bln.USD
Number of deals
unilever m&a case - Mergers and Acquisitions
mergers and aCqUIsITIons In rUssIa and globally, 2005-2010
Index 2005 = 100
Nevertheless, in the first half of 2011 activity in the Russian market of mergers and acquisitions was characterized by relatively high stability as compared to the rest of the world. Unlike the USA and Europe, in 2010 Russian M&A market was dominated (85%) by moderate deals to attract initial capital (<10 mln.USD), and medium-sized transactions (>10 mln.USD <250 mln.USD) The beginning of 2011 looked like the end of 2010: deals announced in the first half year accounted for almost 2/3 of total deal value (in the second half of 2010 were announced 77% of deals). But in the second half of 2011 slowing down of deal closing is forecasted due to increased anxiety about economic perspectives in Europe, and a characteristic decline in business activity in Russia at the threshold of presidential elections.
Volume of M&A market globally Volume of M&A market in Russia
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unilever m&a case - Mergers and Acquisitions
Russian market of mergers and acquisitions is still characterized by closing mainly internal deals. In 2010 purchasing of Russian assets by foreign companies accounted for 18% of all deals, and share of transactions where Russian companies purchased foreign assets increased to 6%, mainly owing to mass media and telecommunications, and to the sector of metallurgy and mining industry â&#x20AC;&#x201C; over half of all deals to purchase foreign assets were finalized in these sectors precisely. The rest of all deals fell on internal transactions. A relatively low volume of Russian assets purchased by foreigners is conditioned not only by difficult economic situation outside Russia. This also indicates that Russia is moving not fast enough towards improving its investment climate and reputation among foreign investors. Taking into account a supposed lower growth rate in Russia, as compared to other BRIC countries, and a subsequent decline in risk/profit ratio, it is possible to suggest that Russian market is under threat to lose part of its investment attractiveness. All in all, 2010 for Russian market can be characterized by steep decline in volume of deals in the oil&gas sector, equally steep increase of overall deals volume in the consumer products market, and by gradual growth in total volume of deals in other sectors.
Telekom and media
General Atlantic
Kaspersky Labs.
Purchaser Subject of the deal Price (mln.USD) Package size Naspers
DST
Largest Deals of 2010 in Consumer Products Market
CocaCola
Nidan Juices
Danone
Unimilk
PepsiCola
Wimm-Bill-Dann
Largest Deals of 2010 in Metallurgy and Mining Industry:
Kinross Gold
Northern Gold
Trafigura
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Norilsk Nickel
unilever m&a case - Mergers and Acquisitions
Personal Care Market
Market Snapshot Personal care market is traditionally vast and keeps to its dynamic growth. In 2010, global beauty care market got an assessment of USD 426 billion. Russian market is the largest in Western Europe and 8th largest in the world in monetary terms. In 2010, Russian personal care market was assessed as EURO 9.6 billion, and got an increase of 6.9% compared to last year. Presently, the market is dynamically restoring its volumes after recession in 2008-2009. During Q1 of 2011, the market augmented by 9.1% in value and by 5.9% in volume against Q1 of 2010. All market segments are growing, yet the most remarkable in its dynamics it the growth of ‘Shower Gel’ segment (12.7% in value, 11.5% in volume) and ‘Antiperspirant’ segment (9.8% in value, 9.1% in volume.) Major market growth triggers are the development of new territories within the existent segments (a good example will be the professional care for mass market, represented by such brands as Syoss, Wella Pro, Prelest Pro,) and product line sophistication (color mousses, thermal water, facial skin care serum.) it should be noted that new areas of focus are developing both in premium and affordable segments. Major market growth trends are: new brands, new categories for existing brands, and wakeup of local players Market shows high level of concentration: six major companies produce 70% of
products. Top six include HENKEL® (19.9% of market), L’OREAL (14.2% of market), Procter&Gamble (13.5% of market), Unilever (10.2%), Beiersdorf (6%) and “Kalina” Group of Companies (6.2%). 9% of the market belong to middle-level international companies (8 players with market shares about 1-2%, among them, Colgate Palmolive, Johnson&Johnson, Reckitt Benckiser, and others.) Middle-level Russian companies also run 9% of the market (altogether, 9 players with shares about 1%.) The remaining 12% of the market are distributed between minor local players (around 40 companies in this category.) Market segmentation is also interesting in terms of sales channels: 51.4% of the products are sold in dedicated beauty care shops, 30.8% in supermarkets and hypermarkets, 4% in superettes12, 7.6% in pharmacies and 6.2% in open-space markets. In respect of regional development, the highest rate of market growth is evidenced in Central region, Siberia and Ural. 39% of beauty care sales are in Central region, 12.2% in Volga region, 15.2% in Siberia, 10.5% in Northwest region, 7.9% in the South of Russia, 11.5% in Ural and 3.7% in the Far East. No prospective growth triggered by extended entry of various segments is presumed. In 2011, entry of shampoos in Russia reached 99%, facial care products – 85%, antiperspirants – 81%, shower gels
– 72%, hair care products – 60%, hair colors – 55%, styling products – 47%. Market segmenting by consumers shows that women and men have 85% and 15% of the market respectively. Women are active consumers of facial, body and hair care products, antiperspirants and shower gels. Men buy shampoos, antiperspirants and shower gels. Generally, Russian consumers love make up products, appreciate diversity (13 thousand of SKU13 of facial care products, more than 5 thousand SKU of hair care products and shampoos), and tend to buy beauty care products as a present. Another distinctive feature of Russian market of beauty care products and personal hygiene is high level of media investments. In Russia, this market takes the first place in terms of media investments level, while in developed countries banks and telecommunication companies take the leadership. Unilever is one of the major media investors in Russia.
12 A small self-service grocery store with a large range of products offered. 13 SKU (Stock Keeping Unit) — a unique identifier code that refers to the products or services sold. Each SKU is attached to an item, variant, product line bundle, service, fee, or attachment.
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unilever m&a case - Personal Care Market
Unilever in Russian Market Beauty care market is characterized by considerable segmentation. Unilever products are presented in different segments of beauty care market: shampoos, hair care, styling, skin care, antiperspirants and shower gels. The most advantageous position Unilever has in such segments as antiperspirants (37.9% of the market) and shower gels (14.7%). Its closest competitors in antiperspirants segment are Beiersdorf (14%), Palmolive (12.5%) and Procter&Gamble (10%), and in shower gels segment Palmolive (19.8%), Beiersdorf (13.5%) and Henkel (13.1%). Both antiperspirants and shower gels are rather large market segments. In 2010, antiperspirants segment was evaluated as RUR 14.6 billion, shower gels as RUR 9.4 billion. The largest segment in the market is shampoos (RUR 26.4 billion). In the segment, Procter&Gamble (21.2% of the market) takes the leadership, and its closest competitor, Henkel, takes 17.2%. Unilever covers 12.3% of the market, L’Oreal – 12.2%, “Kalina” – 10.9%.
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Massive segments of the market are also are: facial care products (RUR 17.8 billion), hair care products (RUR 11.4 billion), and styling (RUR 10 billion). In the area of face care products, the leadership is taken by such companies as L’OREAL (14.1%), Kalina (30.4%), Beiersdorf (3%), Svoboda (5%), and Nevskaya Kosmetika (6.8%). Main global Unilever brands in beauty care segment are “CLEAR vita ABE” (shampoos and hair care products), “Dove” (shampoos, hair care products, shower gels, skin care and antiperspirants), “Timotei” (shampoos, hair care products, styling, shower gels), “TIGI” (styling), “Rexona” (antiperspirants), “АХЕ” (antiperspirants and shower gels), Sunsilk (shampoos, hair care products).
unilever m&a case - Personal Care Market
Concern «Kalina»
15
Company History LLC Concern «Kalina» is a cosmetics company producing and offering a wide range of personal and home care products to the consumers in Russia, Europe and the CIS. The history of Concern «Kalina» began in 1942, when «Uralskie Samotsvety» factory was established in Sverdlovsk (now Ekaterinburg) using the production facilities of «Novaya Zarya» factory that had been evacuated during the war. In 1974, output capacity was significantly expanded, and the factory started production of «Troynoy», one of the most popular eau de cologne brands in the USSR. The company was privatized in 1992; in 1996 T.S.Goryaev consolidated the controlling majority of shares and chaired the young management team. The same year, «Pure Line» brand was launched, which continues to be one of the most popular brands of «Kalina» until now. In 1997, «Black Pearl» was launched, a flagship skin care brand of the company, as well as «Forest Balm», the main company brand in tooth care category. In 1998, the company won the leading position in Russia by sales volume and acquired Omsk Detergent Plant. The company changed its name to Concern «Kalina» in 1999 and ran a nationwide rebranding campaign. European Bank for Reconstruction and Development acquired
19.24% of company shares in 2000. The company went public in 2004 – IPO was held at MICEX, the shares were listed at RTS, and ADR level 1 program was launched. The structure of the company became much more sophisticated in early 00s. Concern «Kalina» acquired a controlling stake in Dr. Scheller Cosmetics AG in 2005, and in order to manage the group’s assets in Europe, Kalina International SA management company was established in 2006. In 2007, the beauty shop chain project, Dr. Scheller Beauty Center, was launched, as well as «Glavskazka International» project aimed at entering the kids goods segment. Production in Germany was switched to outsourcing in 2009, and activities of Dr. Scheller Cosmetics AG started to focus on development and promotion of the company’s brands. 100% of Dr. Scheller Cosmetics AG shares were consolidated in 2010 and sold to Coty Inc. group of companies. Concern «Kalina» Today At the moment, Concern «Kalina» produces a wide range of personal care products and operates in the following market segments: facial care, oral care, hair care, hand and body care, and baby cosmetics. After having adopted the strategy aimed at reducing the number of brands (in the past three years), and after having sold its
business in Germany in 2010, «Kalina» focuses on the five main brands that account for 80% of total sales volume and generate about 85% of revenue. The vast majority of goods is sold in the Russian market (80%), in Ukraine (9%) and in Kazakhstan (5%), as well as in other countries of the CIS. The business of «Kalina» has been growing at an average rate of 13% per annum during the last three years. The main drivers for such an intensive growth have been strengthening positions in budget segment and attracting new consumers in the most low-price segment which includes non-brand goods. The main advantage of «Kalina» products is a combination of decent quality and reasonable price. The product marketing is targeted at consumers aged over 30 which allowed the company to win its own loyal audience without entering the fierce competition for young consumers with the market players like L’Oreal or P&G. Launching products is a strong point of «Kalina». By this parameter, the company can be a match for even large global competitors. Four sales teams are working synchronously in the company, each specializing in its own sales channel: national retail chains, regional retail chains, traditional retail, and pharmacies. «Kalina» products are well represented in the traditional points of sale, especially in small non-chain supermarkets
unilever m&a case - Concern «Kalina»
(43000 points of sale in Russia and the CIS, which is 10000 more than Unilever’s network) and in pharmacies (7000 points). The business of «Kalina» has six main locations. The headquarters and main production facilities are located in Ekaterinburg (Russia). The main distribution center is also located in Ekaterinburg. Four other distribution centers are located in Russian cities of Moscow, Saint-Petersburg, Novosibirsk and Rostov-on-Don, and one in Kiev, Ukraine. The Concern employs about 1900 people, approximately two-thirds of manpower are involved in supplies, 16% are in sales and 15% in management. Apart from the parent company in Ekaterinburg, the Concern structure includes companies «Pallada-Ukraine», «Glavskazka International», «Dr. Scheller Beauty Center», Kalina International SA (Switzerland), Kalina Overseas Holding B.V. (The Netherlands), DSN Cosmetics GmbH (Germany) and Rychkon Limited (Cyprus). LLC Concern «Kalina» is a public company that follows best practices of corporate governance. Shares of the Concern are publicly traded at Russian stock exchanges and in the OTC market overseas in the form of American and Global Depository Receipts. The current ownership structure of the company is illustrated in the Appendix.
Company Structure LLC Concern «Kalina» (Ekaterinburg, Russia) Parent company of the Group Kalina International SA (Lausanne, Switzerland) 100%
Glavskazka International (Ekaterinburg, Russia) 100%
Pallada Ukraine (Kiev, Ukraine) 100%
Kalina Overseas Holding B.V. (Amsterdam, The Netherlands) 100% Rychkon Limited (Cyprus) 100%
Company Name
Field of activity
LLC Concern «Kalina»
Parent company of the Group. Production and sales of cosmetics and perfumery
Kalina International SA
Management of Group’s assets in Europe. Mergers and acquisitions
DSN Cosmetics GmbH
Sales of cosmetics and perfumery
Kalina Overseas Holding B.V.
Protection of intellectual property
Rychkon Limited
Financial company
Pallada Ukraine
Distributor in Ukraine
Glavskazka International
Development and promotion of brands in kids goods segment
ООО «Dr. Scheller Beauty Center»* Dr. Scheller –Center Beauty LLC*
Chain of beauty shops in Russia
Dr. Scheller – Center krasoty LLC*
16
unilever m&a case - Concern «Kalina»
Market Position of the Company As mentioned earlier, Conern «Kalina» produces goods in following categories: skin care (creams, gels, toners etc.), hair care (shampoos, hair balms), oral care (toothpaste, mount rinse), baby cosmetics (shampoos, bath foams, creams, perfume etc.), perfumery, detergents and some other products. Comparative data characterizing activities of LLC Concern «Kalina» in the industry. Facial skin care products market The share of the Company in this market equals to 30.4% as of November-December 2010. The shares of the largest competitors are distributed as follows: L’Oreal & Garnier at 14.1%, Svoboda at 5.0%, Nevskaya Kosmetika at 4.2%, Beiersdorf at 3.3%. The market shares were calculated based on market capacity in volume terms. Hand and body skin care products market The share of Kalina in this market segment equals to 35.6 as of November-December 2010. The shares of large competitors are distributed as follows: Nevskaya Kosmetika at 6.8%, Beiersdorf at 6.5%, L’Oreal & Garnier at 5.0%, Pervoe Reshenie at 3.6%. The market shares were calculated based on
market capacity in volume terms. Hair care products market The market share of the Concern in hair care (shampoos) equals to 10.9% as of NovemberDecember 2010. Market shares of the largest competitors are distributed as follows: Procter & Gamble / Wella / Londa at 21.2%, Schwarkopf / Henkel at 17.2%, Unilever at 12.3%, L’Oreal at 12.2%. The market shares were calculated based on market capacity in volume terms. Oral care products market Toothpaste market share of the Company equals to 7.7% as of November-December 2010. Market shares of the largest competitors are distributed as follows: Colgate-Palmolive at 37.7%, Procter & Gamble at 16.1%, Nevskaya Kosmetika at 8.8%, Skena+Konversiya / Splat at 7.3%. The market shares were calculated based on market capacity in volume terms. Mouth rinse market share of the Concern equals to 45.6% as of November-December 2010. Market shares of main competitors are distributed as follows: Colgate at 18.6%, Avanta at 11.9%, Splat-Kosmetika at 5.1%, Vita at 3.2%. Compared to Russian producers, the The Company launched 296 new products in 2010, with the following distribution between the leading brands:
17
Concern’s main competitive advantages include broad distribution network (the largest among local producers), high and consistent quality of goods and services, active advertizing policy. Due to continuous promotion, the brands of the Concern have high awareness indicators, i.e. they are well-known to the country’s population, while constant improvement of product quality stimulates repeat purchasing, thus creating the stable demand for the goods. Compared to western producers, the main competitive advantages of the Concern’s products are lower price and maintaining the quality level at world standards. Another positive factor is proximity to the consumer, which allows to collect specific consumption data and behavior characteristics on the permanent basis, and to react promptly to changes. The Company expects these factors and trends to remain in force in the middleterm perspective at the least (in 2-3 years to come). Operating results of the Company may be negatively affected by increasing competition from the multinational corporations, changes in consumer preferences, changes in Brand name
taxation, currency and customs regulations of the countries of destination for Concern’s products export. Economic situation inside Russia can also have a significant influence. This particularly includes changes in currency rates (about a quarter of Company’s expenses accounted as costs, are nominated in foreign currency), inflation and interest rates. The Company estimates likelihood of being affected by tougher competition factors as high; likelihood of negative changes in legislation and economic situation in Russia and the CIS countries as average. Maintaining stable political environment in the Russian Federation and the CIS countries, growing economy and adoption of legal framework aimed at improvement of market conditions, liberalization of economy in the countries like Uzbekistan, further reduction of inflation and interest rates, increasing consumer loyalty to Russian brands are viewed by the Company as the factors that can improve its performance. Likelihood of these developments is estimated by the Company as rather high, while duration of their effects (if they do emerge) will last for a long-term period (over 3-5 years). Number of new products in 2010
Little Fairy (Malenkaya feya)
119
Pure Line (Chistaya linia)
82
100 Recipes of Beauty (100 retseptov krasoty)
47
Velvet Hands (Barkhatnye ruchki)
17
Black Pearl (Cherny zhemchug)
12
32
9
Little Dragon (Drakosha)
6
Forest Balm (Lesnoy balsam)
4
unilever m&a case - Concern «Kalina»
The Company launched 296 new products in 2010, with the following distribution between the leading brands:
Market share (by Brand)
Chistaja linia 35% Cherny Zhemchug14% 100 receptov krasoti 12% Barhatnie ruchki 10% Lesnoy balsam 8% Malenkya Feja 6% 32 norma 3% Other 12%
Market share (by category)
Face Care 35% Hair Care 20% Body Care 17% Mouth Care 13% Child Care products 8% Other 7%
At the moment, the price factor continues to play an important role for consumers of the majority of Russian cosmetic companies. In contrast to other Russian producers of cosmetics, the Concern has achieved significant success in working with consumers who highly appreciate the quality and image of the goods they purchase. The Company considers that its target consumer group will be growing together with the wellbeing of the nation.
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The main share in the sales structure belongs to skin care products (47.62%), hair care products (21.89%) and oral care products (12.69%). NAV per share and EPS equaled to 1097 rubles and 164.3 rubles accordingly. Before 2011, the business of Kalina grew at an average rate of 15% per year; five key brands of the company (Pure Line, Black Pearl, 100 Recipes of Beauty, Velvet Hands and Forest Balm) demonstrated the growth of over 20% in 2010. However, the growth slowed down to 8-9% p.a. in the first half of 2011 (all the largest brands were affected). Whereas the 15% yearly growth is maintained in the segments like hair care products, oral care products and baby cosmetics. However the business of Kalina in the face care segment demonstrates decrease in value by 3%. Many brands in this category went through essential price decrease in the past 18 months, which affected the total business value. Even under such challenging conditions Kalina continues to keep its strong market position. The most relevant information regarding market shares of Kalina and its closest competitors by every key segment is available in Appendix.
Share of Concern Kalina in the Russian market by the end of 2010
Mouth rinse
45,6%
Hand and body skin care products
35,6%
Facial skin care products
30,9%
Hair care products (shampoos)
10,9%
Toothpastes
7,7%
0%
10%
20%
30%
40%
50%
Starting from 1998, the output of LLC Concern «Kalina» has been constantly growing both in money and volume terms.
Indicator
2009
Revenue (thousand rubles)
11 204 012
Gross profit (thousand rubles)
6 018 801
2010
% growth
12 776 636
14%
7 344 303
22%
unilever m&a case - Concern «Kalina»
Possible Synergies It is important to understand that acquisition of Concern «Kalina» by Unilever and competent integration of Kalina into Unilever business may lead to a number of synergies. A synergetic effect in economy is improving performance as a result of combination, association, integration, merger of elements into a system. In M&A deals, synergies are not an abstract idea; synergies are identified and carefully estimated one by one. Let us review a case. For instance, the value of the target object intended for merger is 60 units. Taking into account all the synergies caused by its acquisition by a large company, the value of the object would rise to 100 units. What will be the fair price of acquisition in this case? Evidently, it will be between 60 and 100, because the price under 60 units would be just unprofitable for the shareholders of the target company, while the price over 100 units would be unprofitable for the buyer of the business. However, the buyer will be trying to set the price as closer to 60 as possible, and the seller will be raising the price to 100. The real transaction price is being set in the process of negotiations, and we can only assume that it would be settled at around 70, because the buyer has to pay a premium for synergies, though this premium
cannot be too high as the synergies are created by the buyer himself to a great extent. Before evaluating synergies, it is necessary to evaluate the stand-alone business first, in other words to evaluate the business without the effects of the transaction. Evaluation of the stand-alone business provides for understanding the fair value of the business (in the case above it equals to 60 units) and the minimal price of acquisition. Evaluating synergies is the second stage of the appraisal. Let us proceed to evaluating synergies now. Synergies can materialize in two main areas: revenue and cost. It is important to realize that evaluation of synergies should take into account not only potential growth of revenues (and reduction of costs), but also expenses that are necessary for these synergies to occur. Realization of synergies is a complicated process which is handled at the stage of company integration, and integration costs exceed planned targets quite often. It should also be taken into account that realization of synergies does not happen immediately, and there should be a timeline forecast for a particular synergy to be realized. The examples below demonstrate some possible synergies of Unilever and Kalina
merger14: 1) Synergy in purchases of feedstock and packaging Increasing the volumes of combined purchases for certain feedstock categories may lead to significant improvement of conditions with the suppliers. For larger volumes, suppliers tend to offer discounts which may lead to reduction of production costs by 5-7%. 2) Synergy in media buying Personal care market is the largest in Russia by the volume of investing in media. When negotiating for TV advertising broadcast time in Russia, the price is calculated individually for every client; therefore the strength of bargaining position is very important. Merger of the companies will strengthen the bargaining positions significantly, and will assist in improving the media buying conditions. Advertising budget of Kalina amounted to almost 2 bln rubles in 2010; over 80% of the budget was allocated to ATL15 advertising, while only 150 mln rubles were spent on BTL16 activities. As forecasted, the advertizing budget of Kalina should grow 25% in 2011 (not counting possible synergy). 3) Synergy in transportation and storage Increasing production volumes will trigger restructuring and unification of two separate
logistics networks into a large combined network which will give a scale advantage in reducing the costs of operating this network. However it should be noted that restructuring logistics network is a long and expensive process. 4) Synergy in administrative costs Head office of Kalina, as well as Finance, IT and HR departments, are located in Ekaterinburg. While keeping the management team in place and reinforcing it with a team of managers from Unilever in Ekaterinburg, all the auxiliary departments (Finance, IT, HR) can be moved to Unilever service center in Omsk, which will allow to reduce personnel costs significantly (this move can reduce the number of employees by 140 people altogether). Also, certain functions like security can be outsourced (thus saving on the payroll of 65 employees and changing the expense account from personnel costs to payment for third party services). 5) Reduction of working capital Capital turnover cycle for Kalina is about 130 days, while for Unilever it is 10 days. These figures cannot be compared directly, since the Unilever figure is an average for all businesses of the company (except for ice-cream) and may not reflect the trends in personal care products in full.
14 When doing this case, participants can go beyond the list, add and exclude synergies as they wish and in case they find it suitable. 15 ATL – Above the line activities are used to target mass audiences, including potential consumers (this includes TV, radio, newspaper, outdoor advertising etc.) 16 BTL – Below the line activities are targeting the potential consumer directly (promotions, competitions, prize drawings etc.)
19
unilever m&a case - Concern «Kalina»
But a more detailed analysis shows that the sales in inventory period at Unilever is 70 days, while at Kalina it is 120 days. This can partially be explained by the fact that Kalina works with 210 distributors, while Unilever works with only 65. Large distribution network requires more sophistication in management, and simultaneous communication with a large number of distributors leads to a bigger period of sales in inventory. Also, Unilever is characterized by a more stable inventory level throughout the year, by faster payments of both bills receivable (15 days versus 80) and payable (70 days versus 78). In general, introduction of Unilever management system at Kalina can improve the situation and financial performance of Kalina. 6) Reduction of sales costs The cost of supporting Sales Department at Kalina equals to 15 mln Euro annually (which includes remuneration for 260 employees, over 60 controlling specialists, contracts with more than 1300 outsourced merchandisers and sales representatives. Meanwhile, the salary level at Kalina is the same as at Unilever. Merger of the teams, internal restructuring and dismissal of certain employees can reduce the costs of combined business significantly. 7) Improvement of distribution platform Kalina is working with the network of 210 distributors in Russia, covering well the whole sales territory (for instance, Unilever has only 65 distributors in Russia, half of them are involved in distribution of food products only). Kalina is working with 2-3
20
distributors simultaneously in every region, which allows to stabilize the supplies and improve conditions. For every distributor, Kalina is one of the key clients. Apart from this, Kalina has launched a special program aimed at stimulating sales in small towns with population under 250 thousand. All these factors taken together give grounds to expect that distribution network of Kalina will significantly strengthen distribution of Unilever goods and will result in the growth of sales. 8) Opportunity to use technology knowhow of Unilever in Kalina production process This will assist in reducing the cost of production, improving quality, and making production more environmentally friendly.
unilever m&a case - Concern ÂŤKalinaÂť
Appendix
21
Appendix 1. Financial position of Concern «Kalina» CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Notes ASSETS Non-current assets Property, plant and equipment, net Loans issued for property,plant and equipment Goodwill Other intangible assests Long-term investments Deffered tax assets Total non-current assest Current assets Inventories Trade and other receivables Advances paid ro suppliers and expenses Loans receivable Taxes recoverable Cash and bank balances Assets classified as held for sale Total current assets TOTAL ASSETS
22
13
14 10
15 16
17 18 19
6 months ended 30/06/2011 RUB’000
Year ended 31/12/2010 RUB’000
1,650,479
Year ended 31/12/2009 RUB’000
2,222,586
-
-
562,979
162,698 24,755 269,543 2,107,475
163,877 24,554 240,341 2,519,750
521,790 805,148 24,554 164,345 4,301,402
1,423,120 2,312,441 381,158
1,518,942 2,937,638 344,730
2,280,467 2,270,404 471,988
333,701 385,149 43,920 390,610
342,376 287,980 758,678 2,284,648
273,617 555,444 93,616
5,270,099 7,377,574
8,474,992 10,994,742
6,395,536 10,696,938
unilever m&a case - Appendix
6 months ended 30/06/2011 RUB’000
Year ended 31/12/2010 RUB’000
Year ended 31/12/2009 RUB’000
619,866 (1,116,926) 159,820 2,414,660
851,843 679,336 (1,664,072) (275,430) 3,718.975
851,843 679,439 (723,086) (28,460) 2,947,767
2,077,420
3,310,652
3,727,503
2,077,420
13,512 3,324,164
27,395 3,754,898
20 10
2,434,235 130,356 2,564,591
2,958,782 137,506 3,096,288
704,422 337,736 738 157,933 1,200,829
Trade and other payables Borrowings
21 20
1,417,803 1,113,975
1,702,818 1,498,960
2,353,650 3,059,678
Taxes payable Finance leases Liabilities classified as held for sale Total current liabilities Total liabilities
17
203,785 2,735,563 5,300,154
155,606 1,216,906 4,574,290 7,670,578
321,463 215 6,205 5,741,211 6,942,040
7,377,574
10,994,742
10,696,938
Notes
EQUITY AND LIABILITIES Share capital and reserves
22
Share capital Share premium Reserve for own shares Translation reserve Retained earnings Equity attributable to Shareholders of the Company Non-controlling interest Total equity Non-current liabilities Borrowings Deffered tax liabilities Finance leases Retirement benefit obligations Total non-current liabilities Current liabilities
TOTAL EQUITY AND LIABILITIES 23
19
unilever m&a case - Appendix
6 months ended 30/06/2011 RUB’000
6 months Year ended Year ended ended 31/12/2010 31/12/2009 30/06/2010 RUB’000 RUB’000 RUB’000
397,325
437,370
1,317,040
622,928
183,895 (23,618) (40,198) 2,856
174,459 25,991 (33,206) 1,058
480,721 (11,190) 31,516 19,169 31,516 321,587
83,362
148,566
405,439 (176,368) (3 554) 190,000 129,792 (3,554) 397,011 -
Operating cash flow before movements in working capital
603,622
754,238
Cash from operating activities before changes in working capital
-
-
2,259,360
1,464,731
597,444 95,822 (97,169) (285,015)
349,521 483,694 151,952 (449,479)
(678,142) 127.258 (18,437) 301,405 (142,680)
(302,772) (197,400) 74,685 281,921 (8,998)
-
-
(17,211)
9,035
Appendix 2. Cash flow statement CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities Profit for the year before tax including profit from discontinued operations Net finance cost Unrealized foreign currrency exchange gain (Gain) loss on disposal of discontinued operaton Impairment loss on advances given Impairment loss on trade and other receivables Loss on disposal of property, plant and equipment Depreciation and amortisation of non current assets Depreciation and amortization of non-current assets
Movements in working capital Decrease/(increase) in trade and other receivables Decrease/(increase) in advances issued (Increase)/decrease in taxes recoverable Decrease in inventories Increase/(decrease) in taxes receivable Increase/(decrease) in trade and other accounts payable (Decrease)/increase in retirement benefits obligation
24
unilever m&a case - Appendix
(Decrease)/increase in taxes payable
(48,179)
138,759
(115,435)
86,025
Cash flows from operations before income taxes and interest paid Interest paid Income taxes paid Net cash generated by/(used in) operating activities
962,883
1,151,167
2,001,478
1,407,227
(197,609) (181,915) 583,915
(204,322) (280,313) 666,532
(448,022) (181,95) 1,054,933
(598,780) (129,025) 679,422
(122,000)
-
-
-
1,519,993 (57,945) (12,933)
(15,968) -
(531,951) (6,298)
300 (16,199) 28,430 120,042 (55,052) (95,376)
4,480
1,191
44,920
1,936
1,331,595
(14,777)
(493,329)
(16,519)
Cash flows from investing activities Payments for additional shares in Kalina Overseas Holding B.V Proceeds from disposal of investments Purchase of long-term investments Purchase of short-term investsments Interest income received Loans returned for property, plant and equipment Payments for property plant and equipment Payments for intangibles Proceeds from disposal of property, plant and equipment Net cash used in investing activities
25
unilever m&a case - Appendix
Cash flows from financing activities Proceeds frow borrowings Repayment of borrowings Repayment of capital lease obligations Purchase of own shares
26
3,301,974 (3,956,539) (263) -
12,656,325 11,819,879 (227) -
6,771,982 (6,811,236) (3,793) -
Dividends
4,397,263 (5,301,575) (1,516,476) (1,516,476) (209,480)
(90,382)
-
-
Payment for additional shares in Dr. Scheller
-
-
(42,806)
(98,022)
Proceeds of own shares sold
-
-
1,808
40,220
Repurchase of own shares
-
-
(942,897)
(256,594)
Dividents paid
-
-
(179,678)
(43,810)
Net cash (used in)/ generated by financing activities Net increase in cash and cash equivalents Cash and cash equivalents reclassified to assets held for sale Cash and cash euivalents at the beginning of the period Cash and cash euivalents at the end of the period
(2,630,268) (745,210)
(327,354)
(401,253)
(714,758) -
(93,455) -
234,250 (31,016)
261,650 -
758,678
139,394
555,444
293,794
43,920
45,939
758,678
555,444
unilever m&a case - Appendix
Appendix 3. Statement of comprehensive income CONSOLIDATED STATEMENT OF COMREHENSIVE INCOME
Revenue Cost of sales
Notes
Year ended 31/12/2010 RUBâ&#x20AC;&#x2122;000
Year ended 31/12/2009 RUBâ&#x20AC;&#x2122;000
5 6
11 672 588 (5 457 162)
10 175 129 (5 195 187)
6 215 426
4 979 942
7 8 14
(3 361 885) (1 032 915) (190 000)
(2 790 631) (898 403) -
9
(109 153) (12 763) 1 508 710
(147 477) (33 110) 1 110 321
3 126 (408 565) 207 934 1 311 205 (340 165) 971 040
95 879 (537 147) (83 972) 585 081 (199 096) 385 985
Gross proffit Marketing and distribution expenses Administrative expenses Impairment losses on loans receivable Inventory obsolescence expenses Other operating income and expenses Operating results before finance income and costs Interest income Interest expense Foreign exchange gain Profit before income tax Income tax expense Profit for the year from continuing operations
27
10
unilever m&a case - Appendix
Appendix 3. Statement of comprehensive income CONSOLIDATED STATEMENT OF COMREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2010
Profit from discountinued operations (net of income tax) Profit for the year
12
Attributable to: Shareholders of the Company Non-controlling interest Other comprehensive income Foreign currency translation differences for foreign operations (net of income tax) Total comprehensive income for the year Attributable to: Shareholders of the Company
28
4 307
28 738
975 347
414 723
974 060 1 287
412 859 1 864
(242 508)
16 553
732 839
431 276
727 090
423 813
5 749
7 463
Non-controlling interest Earnings per share Basic and diluted (rubles per share)
11
133
46
Continuing operations Basic and diluted (rubles per share)
11
133
43
unilever m&a case - Appendix
Appendix 4. Market position of Kalina in August-October 2011
8 Face care Market growth Kalina Pure line Black pearl 100 Recipes Lâ&#x20AC;&#x2122;Oreal Beiersdorf J&J P&G Schwarzkopf Pervoe reshenie Narodnie promysly
29
Volume share 9 10
11
Value share 9 10
8
11
-2,20% 33,08 33,92 12,60 13,13
-1% -0,20% 33,50 34,23 13,86 14,60
10,80% 18,48 20,48 5,04 5,99
0,20% 21,11 6,93
-1,20% 21,74 7,35
7,46 7,25 11,13 4,10 3,05 1,58 0,95
7,67 8,19 13,34 3,47 2,73 1,37 0,84
7,35 8,40 13,55 3,36 2,21 1,47 1,05
8,09 8,40 13,65 3,05 2,10 1,58 1,16
8,30 2,73 20,58 5,88 6,20 4,20 2,52
9,03 3,47 24,15 5,15 5,25 3,89 2,21
8,93 3,89 24,68 5,04 4,62 3,47 2,31
9,45 3,99 24,47 4,52 4,31 3,68 2,63
2,31 1,58
2,10 1,68
2,10 1,58
2,31 1,68
0,74 1,26
0,74 1,47
0,74 1,47
0,74 1,47
unilever m&a case - Appendix
Appendix 4. Market position of Kalina in August-October 2011
H&B Market growth Kalina Black pearl Pure line Silky hands 100 Recipes Unilever (Dove) Lâ&#x20AC;&#x2122;Oreal Beiersdorf Schwarzkopf J&J Pervoe reshenie Shampoo+ Conditioner Market growth Kalina Pure line 100 Recipes Unilever Sunsilk Timotei Dove Clear vita A be Lâ&#x20AC;&#x2122;Oreal Beiersdorf P&G Schwarzkopf
30
27,30 1,37 5,57 14,07 1,37 6,83 5,88 9,56 0,32 4,20 4,41
-0,02 30,87 0,84 6,20 16,17 2,10 5,04 6,93 8,93 0,32 3,47 4,10
0,06 33,39 0,53 6,83 18,23 2,73 3,57 5,46 9,56 0,11 2,73 4,94
0,05 35,49 0,63 6,72 20,79 3,15 3,36 6,09 9,45 0,11 2,63 4,73
19,85 1,58 3,78 10,50 1,05 9,77 11,03 12,29 0,84 6,09 1,79
0,06 23,10 1,05 4,52 12,81 1,58 7,46 12,50 12,18 0,84 4,83 1,89
0,07 26,04 0,63 5,25 15,33 2,00 5,57 10,40 12,60 0,42 3,68 2,31
0,12 28,77 0,74 5,15 18,27 2,21 5,04 9,98 12,08 0,32 3,57 2,21
7,98 5,15 2,84 13,34 3,47 5,78 2,10 2,10
0,01 11,03 7,25 2,84 12,18 2,42 5,78 1,68 2,21
0,09 12,39 8,19 3,26 11,24 1,58 5,67 1,37 2,52
0,13 12,71 8,61 3,15 10,82 1,47 5,46 1,47 2,42
4,10 2,84 0,74 14,70 4,10 4,41 2,84 3,36
0,13 5,88 4,10 1,05 13,34 3,26 4,10 2,21 3,78
0,19 7,14 5,04 1,47 12,08 2,21 4,10 1,79 3,99
0,10 7,56 5,36 1,47 11,76 1,89 4,10 1,89 3,89
10,08 3,15 22,05 15,65
9,98 2,73 18,17 17,01
10,29 2,73 15,96 18,38
10,92 2,52 15,96 17,58
14,81 4,31 27,72 16,17
14,81 3,99 26,15 18,48
14,81 3,78 23,52 20,27
14,70 3,57 22,79 19,64
unilever m&a case - Appendix
Appendix 5. Valuation and financials of Kalina, USD mln (October 2011)
Sales
EBITDA
Net profit
EPS, USD
EBITDA margin
EV
Net debt
EV/Sales
EV/CF
EV/EBITDA
P/E
P/CE
EV/IC
RolC/WACC
Appendix 6. Valuation of beauty products sector Price USD
Market capitalization USD mln
EV USD mln
Bloomberg ticker
EV/Income 2011E
2012E
2013E
2011E
2012E
2013E
2011E
2012E
2013E
Comparable companies in developed markets
Average for developed markets Comparable companies in developing markets
Average for developing markets
31
unilever m&a case - Appendix
Appendix 7. Beauty products market: growth of EBITDA and Sales in USD in 2011E-2013E taking into account margin figures
EBITDA Growth
EBITDA Margin 2011E
2012E
2013E
2011E
2012E
Net Margin 2013E
2011E
2012E
Sales Growth 2013E
2011E
2012E
2013E
Comparable companies in developed markets
Greece
Weighted average in developed markets Comparable companies in developed markets
Brazil (India) Weighted average in developing markets
32
unilever m&a case - Appendix
Appendix 8. Ownership structure of LLC Concern «Kalina» The sharholders of OJSC Concern «Kalina» as of June 30, 2011 is as follows:
Shareholders and nominees
30/06/2011 Number of shares
33
Ownership interest
31/12/2010 Number of shares
Ownership interest
Prego Holdings Limited VTB Capital Deutsche Bank Trust Company Americas
1,973,742 869,415 632,859
37,68% 16,60% 12,08%
1,937,567
26,46%
Renaissence Securities (Cyprus) Limited JP Morgan Russian Securities PLC UniCredit Bank AustriaAG UniCredit Securities International LTD HSBC Bank PLC Other owners Total
437,297
8,35%
821,580
11,22%
308,050
5,88%
-
-
1,045,799
14,28%
-
-
849,937
11,61%
1,016,953 5,238,316
19,41% 100%
690,000 1,977,045 7,321,928
9.42% 27,01% 100%
unilever m&a case - Appendix