Some major names in the food and drinks industries are said to have eyed up the GlaxoSmithKline assets under review – at the centre of which is the Horlicks brand in India. Which suitor could win out? Dean Best reports.

GlaxoSmithKline’s potential sale of a clutch of assets – including food-and-beverage brand Horlicks – is said to have attracted at least the passing interest of some of the world’s largest food and drinks companies.

But which of the industry behemoths are likely to be battling it out in a process that could be wrapped up by the end of the year?

The UK-based pharmaceuticals giant announced in March it was reviewing the future of Horlicks (having sold the European rights to the brand last year), as well as some other “consumer healthcare nutrition” products, in order to fund the company’s move to buy out Swiss peer Novartis from a joint venture.

GSK did not specifically say the assets were up for sale but the phrase “strategic review” more often than not is jargon for announcing assets are on the block. The group said there could “no assurance that the review process will result in any transaction” but added it “expects the outcome of the strategic review to be concluded around the end of 2018”.

Of the assets under review, the majority of sales are made in India. GSK said the assets generated sales of GBP550m (US$719.3m) in 2017. The largest brand in the portfolio is Horlicks, under which GSK markets a range of malt-based beverages for which the brand is best known, as well as offering oat-based breakfast cereal and biscuits.

The portfolio also includes Boost, another brand under which GSK markets malt-based drinks and biscuits, as well as Foodles noodles, a line developed with Japan’s Nissin Foods Holdings. 

In India, the products are sold by GlaxoSmithKline Consumer Healthcare Ltd, a public company listed on the country’s National Stock Exchange and Bombay Stock Exchange. The review includes an assessment of GSK’s 72.5% shareholding in the company.

The focus of the talk surrounding where the assets could end up next has centred on the Horlicks beverages and, to a lesser extent, the Boost drinks, with the biscuits, cereal and noodle products seen as relatively small.

Throughout the summer and into autumn, some of the largest names in the food and drinks industries have been reported to be interested in the assets and, as the clock has ticked down to when GSK expects to complete its review, it has been reported the race is entering its final furlongs.

India’s The Economic Times reported in September Nestlé, Unilever and Coca-Cola Co. had reached the second stage of bidding. That said, the same newspaper said it was unsure how many companies were still in the running. Other names that had been linked with bidding for the assets had included PepsiCo, Reckitt Benckiser, General Mills, Danone and Kellogg.

A fortnight ago, Danone confirmed it wasn’t in the running. “I can tell you fresh news that we are not going to bid for Horlicks,” Danone CEO Emmanuel Faber said at an investor event at the French giant’s UK offices west of London. “We have exactly the same product as Horlicks in India … we will not go for Horlicks because we don’t believe the evaluations will meet the metrics that we need to grow our business in India. We will pass on this huge, fantastic opportunity.”

Unsurprisingly, there has been precious little public comment made elsewhere. “We have no comment,” a Nestlé spokesperson said when approached for this article, for example. That, however, has not stopped equity analysts covering some of the reported suitors from weighing up which companies could be interested in the GSK assets under review – and how much could end up being paid.

Analysts at US investment bank Sanford Bernstein have landed on two of the reported runners and riders they think could be at the head of the pack.

“Overall, we think Nestlé and Coca-Cola are favourites to complete the deal,” Sanford Bernstein analyst Ali Dibadj says. “We understand that Nestlé and Unilever have both made initial bids, along with Coca-Cola and a KKR-led consortium. Indications are that Reckitt Benckiser and Danone have looked, but baulked at the price, and we feel sure that Mondelez International, PepsiCo and Procter & Gamble have also looked.”

The Sanford Bernstein analysts suggest there are a number of factors that make this episode one of the more “curious” possible transactions in the sector in recent years.

“While this may not be a massive deal (our estimate is around $3bn), it is a curious case: virtually all the business is based in one big emerging market – India – and it is likely to attract significant interest from many of the world’s biggest food and beverage companies who may need to pay a big premium to win the M&A battle,” Dibadj explains.

The news reports on the rumoured race for the assets have claimed initial bids that were tabled were between US$2.5bn and $3bn. If that’s the case, Sanford Bernstein’s research suggest a potential price tag that sits above the more usual multiple for transactions in the food and drinks sectors this decade.

“News reports suggest that the initial bids were in the $2.5-3bn range. This implies an EBITDA multiple in the 18-21 times range, well above the 16 times average multiple in the food space since 2000,” Dibadj says. “The above-average multiple makes sense, given the appeal of the categories and markets in which the portfolio operates and the competition to acquire it. Our base case is a valuation of $2.5bn (18 times EBITDA) but it is possible that it could go for as high as $3.1bn (our aggressive case at 22 times EBITDA).”

The belief the review could lead to a sale at a lofty multiple is shared elsewhere in the investment community. Alain Oberhuber, a Switzerland-based analyst covering Nestlé and Unilever at German bank MainFirst, issued a note in mid-September that said the price could reach $4bn. “At $4bn, this would be a multiple of more than five times sales and 30 times EBIT for [GSK’s] health nutrition business. Obviously, the potential transaction price is high, as last time Nestlé did not continue its negotiation for Pfizer‘s consumer health business, where multiples were also expected to be more than five times sales.”

Oberhuber added: “We would be surprised if Nestlé is really willing to pay this high price, although the product fits well to Nestlé as, one, it is a reasonable expansion to Nestlé’s milk drink business Milo, and, two, the business increases its exposure in India, where Nestlé is not strong with Milo.

“For Unilever, the case would fit well as the company has a strong exposure in India – the country is 5.8% of Unilever’s group sales – and Unilever’s Indian revenues are mainly in home and personal care, at 80%, while foods represents just 20%.”

Focusing on Horlicks, the largest brand in the assets under review, the analysis from Sanford Bernstein suggests Horlicks has a strong hold on the market for flavoured powdered drinks in India, accounting for 56% of the segment, with the brand four times the size of the number two player, Mondelez.

However, the bank says growth has eased. “Growth slowed from 15% to 4% between 2013 and 2017 and share fell from 67% to 56%. Management has indicated, however, that performance has started to pick-up again in recent quarters,” Dibadj says.

There could be an argument the brand could further kick on under the ownership of a business more anchored in the food and drinks industries, what with GSK slowing shedding assets in those sectors in recent years.

Nestlé has been relatively active in M&A since CEO Mark Schneider took the helm at the world’s largest food maker in early 2017. And, while it has invested in up-and-coming businesses, it hasn’t been averse to signing off on larger deals, for example paying $7.1bn for a licensing deal with Starbucks.

Could Nestlé’s presence in powdered drinks with Milo give it an edge and scope to extract synergies from a potential deal?