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January 2011
‘THE DEAL’ Case Study
Rishabh Bhandari
Vinay Chokhra
Yudhajeet Banerjee
Shailabh Kothari
Team: The Falcons Campus: NMIMS
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Industry Outlook
Overview of Acquirer – Procter & Gamble (PG) Growth options for P&G
Overview of Target – Reckitt Benckiser Group (RBG) Earnings sensitivity for RBG
Acquisition Rationale: Strategic Fit
Valuation Discounted Cash Flow Trading Comparables Transaction Comparables Valuation Summary Synergies
Financial Feasibility Deal Structure Execution Considerations Key Issues
Other Alternative Targets
A G E N D A
With the recovery of global economy, leading companies expected to return to growth in many FMCG markets in 2010
Strong Growth in China and other emerging economies
The premiumisation trend that was in evidence across all markets before the recession has begun to reemerge
New product development - combining greener and healthier attributes
Unemployment remains high, making consumers cautious about overspending
Economic uncertainty persists in many markets; there is a threat of a ‘double dip’ recession in some, and sovereign debt crises in others
Shoppers have become more thrifty as a result of the credit crunch
Developed markets are saturated, FMCGs face price competition
CONSTRAINTS
The mature and stable home care market was affected mildly by price competition, as well as a decrease in new home purchases as a result of the credit crunch.
Skin care held up relatively well, with value sales down by just under 1% in 2009. Premium categories such as masks and nourishers/anti-agers posted positive growth
The beauty and personal care market was impacted by poor performances in several key markets, such as Japan and the US, although this was offset to some extent by strong growth in emerging markets
The consumer health market held steady in 2009 as self-medication was favored by some over expensive doctor visits and prescription drugs
Changing demographic patterns continued to impact several FMCG sectors in 2009 and 2010. Lower birth rates and ageing populations affected eating and drinking patterns, health spending and consumption of beauty and personal care, and tissue and hygiene products
CURRENT TRENDS
95%
95%
70%
60%
80%
55%
75%
50%
55%
60%
75%
60%
Product Innovation
Greater R&D spend
Global Expansion
Acquisitions in core business
Divestitures from non-core activities
Investments in emerging economies
FY 2010 FY 2009
Growth strategies for top 100 consumer goods companies: OC&C Consultants research
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With developed markets showing sluggishness, emerging markets lay the path for growth
1
Source: Euromonitor International and Annual Reports of companies in HPC
Changing Strategic Intent
DRIVERS
-15 -10 -5 0 5 10 150
5
10
15
US
Japan
Brazil
ChinaUK
Laundry Care
Surface Care
Dishwashing
Air Care
Insecticides
Toilet Care
Polishes
Bleach
- 30,000 60,000 90,000
HOME CARE
-8 -6 -4 -2 0 2 4 6 8 10 120
2
4
6
8
10
12
14
16
18
US
Japan
Brazil
ChinaGermany
%growth 2009
%growth 2009%growth 2009
%gr
owth
201
0
%gr
owth
201
0
%gr
owth
201
0
USD million USD million USD million
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Top
5 M
arke
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-6 -4 -2 0 2 4 6 8 10 12
-5
0
5
10
15
20
US
Japan
Brazil
China
Germany
Mar
ket s
ize
FY 2
010
FY 2
009
Mar
ket S
ize
Skin Care
Hair Care
Colour Cosmetics
Fragrances
Oral Care
Bath Shower
Men's grooming
Deodrants
Sun Care
Baby Care
Depilatories
- 50,000 100,000
%gr
owth
201
0Cough, Cold and Al-
lergy
Hay Fever remedies
Medicated skin care
Eye Care
Adult mouth care
Calming and sleeping
- 40,000 80,000
CONSUMER HEALTHBEAUTY AND PERSONAL CARE
Intensification of cocooning trend during recession benefited Home and Personal Care Sector
2
USD million USD million
%growth 2009
Source: Euromonitor International and Passport Database August 2010
Global Headquarters: Cincinnati, Ohio, U.S.Employee Strength: 127,000
Markets more than 300 brands in over 180 countries spanning Americas, Europe, the Middle East and Africa (EMEA), and Asian region
Top 50 leadership brands account for 90% of P&G’s sale and 90% of P&Gs profit
Strongly focused on expanding HPC portfolio while divesting the non-core business (Appendix A1)
Strategy to touch and improve lives of: More consumers In more parts of world More completely
42%
21%
13%
9%
15% North America
Western Europe
Central & Eastern Europe, Middle East & Africa
Latin America
Asia
GEOGRAPHY WISE REVENUE BREAKUP - FY2010
2006 2007 2008 2009 2010 -
15,000
30,000
45,000
60,000
75,000
90,000
0.0%
4.0%
8.0%
12.0%
16.0%
20.0%
24.0%
Net sales Operating Income Net Earnings
Net margin
OVERVIEW
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P&G turns to emerging markets to realize its strategy of acquiring larger consumer base
3
BUSINESS MARGINS AND PROFITABILITY
Source: P&G Annual Report and Investor Presentations
USD
mn
24%
10%
14%4%
30%
18%
Beauty GroomingHealth care Snacks and Pet careFabric care and home care Baby care and family care
SEGMENT WISE REVENUE BREAKUP - FY2010
Bea
uty
and
Per
sona
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are
Skin CareOral Care
Men'sHair Care
Fragrances
0 5 10 15 20 25 30 35 40
Procter & Gamble Beauty and Personal Care Market presence by main market share
200920062003
% Value Market Share
Hom
e C
are
Laundary CareDishwashingSurface Care
Air CareBleach
0 5 10 15 20 25 30
Procter & Gamble Home Care Market presence by main market share
20092006
2003
% Value Market Share
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4P&G leads the market in laundry care and men’s grooming segment
Source: P&G Annual Report 2010 and Euromonitor International
Company Name 2005
2006
2007
2008
2009
2009 % Value Share
Procter & Gamble 1 1 1 1 1 11.70%
L’Oreal Groupe` 2 2 2 2 2 10.10%
Unilever 3 3 3 3 3 6.80%
Colgate- Palmolive 4 4 4 4 4 3.70%
Avon Products 6 6 6 5 5 3.40%
Company Name 2005
2006
2007
2008
2009
2009 % Value Share
Johnson & Johnson 1 1 1 1 1 5.80%
GlaxoSmithKline Inc 3 3 3 3 2 3.20%
Bayer AG 2 2 2 2 3 3.10%
Novartis AG 5 4 4 4 4 2.40%
Pfizer Inc 4 8 9 6 5 6.20%
P&G’s market share in different sub-segments of HPC sector Company Rankings in different segments of HPC w.r.t. Value
Company Name 2005
2006
2007
2008
2009
2009 % Value Share
Procter & Gamble 1 1 1 1 1 18.60%
Unilever 2 2 2 2 2 10.10%
Reckitt Benckiser 3 3 3 3 3 8.70%
Henkel 4 4 4 4 4 6.60%
SC Johnson & Sons 5 5 5 5 5 6.20%
Hea
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are
CoughDigestiveSkin Care
Child CareHerbal
0 10 20 30 40 50 60 70
Procter & Gamble Consumer Health Portfolio
200920062003
% of Total Portfolio
Organic Growth
Acquisition in existing
markets
Piecemeal acquisitions in
Europe and Asia
Large/sizeable acquisitions
RATIONALE PROS CONS SUITABILITY
Acquisitions in new geographies like South East
Asia and Australia
Focus on faster-growing segments of the market e.g. consumer health
Focus on high growth product categories e.g. antiseptics, nourisher
Expand market share within independent category
Expansion in Natural/organic products
Can Leverage on existing capabilities
Low execution risk
Difficult to maintain existing growth rate in long term
Adversely affected by negative macroeconomic and consumer spending scenario
Customer base expansion and integration of new customer into existing offer
Geographic infill Select product category growth
Track record of successful acquisitions
Limited execution risk Synergies from increased
network density, potential revenue benefits
Fit/Integration of regional/Local players into P&G’s model
Most businesses are family owned – uncertainty on outcome of negotiations
Significantly gain market share vs. competitors
Capitalize on high industry fragmentation
Reinforce competitive position in core markets
Meaningful distribution synergies from network overlaps
Execution risk mitigated by strong market knowledge
Integration risk – potentially costly Anti-trust considerations – in
relation to number of national networks
No market diversification achieved
Enter new markets with strong competitive position through sizeable acquisitions
Increase scale and expand multi-country platform
Access to and transfer of additional know-how of acquired assets
Become Asia-Pacific Home Care frontrunner – precursor of new opportunities
Reinforce group’s competitive position through additional scale and market diversification
Best Practice sharing
High execution risk – need to decide the level of integration between country operations
Limited cost synergies – mainly in purchasing
Need to build expertise/knowledge of new markets
Acquisitions in contiguous businesses
Upstream integration: food producers, chemical plants
Downstream integration: retail chains, health spa
Cost benefit Benefit for product
innovation
Channel conflict May require different skill-set High execution risk especially for
downstream integration
STRATEGY
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5Sizeable acquisition in existing markets is the most suitable option for P&G to maintain its growth rate
Global Headquarters: Berkshire, UK
Employee Strength: 24,900
• One of the leading manufacturers & marketers of branded products in HPC sector with operations in 180 countries
• 17 Powerbrands generate 70% of the revenues
• Competes with P&G, Colgate-Palmolive, Clorox, S.C. Johnson, Henkel and Unilever in global markets
• World market share: 9%
FY08 FY09 FY10E FY11E
P/E (x) 16.1 14.1 14.8 14.8
EV/Sales (x) 3.2 3.1 3.0 2.9
EV/EBITDA (x) 12.8 11.2 11.4 11.3
FY08 FY09 FY10E FY11E
Revenues 6563 7753 8192 8544
% change 24.60% 18.13% 5.66% 4.30%
EBITDA 1642 2017 2102 2130
% change 28% 22.84% 4.21% 1.33%
Net Income 1120 1418 1491 1533
% change 19.40% 26.61% 5.15% 2.82%
ROE 34.70% 35.30% 29.50% 26.10%
ROCE 18.40% 24.20% 23.40% 23.40%
Share price (£) Net Debt Mkt. Cap.
31.9 -251 23,229
26-Ja
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6-Apr
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3,000
3,500
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5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00Volume ('000)
Close Price
KEY FINANCIALS (£ mn)
Shareholder % Holding
JAB Holdings B.V. 15.42%
Legal and General Group plc. and/or its subsidiaries 3.95%
Massachusetts Financial Services Company and/or its subsidiaries
4.11%
Others 76.52%
OVERVIEW
PRICE-VOLUME TRENDS
KEY SHAREHOLDERS
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6Reckitt Benckiser Group with global market share of 9% and strong brands can be one of the targets
Source: RBG Annual Report, Company website and Bloomberg
BUSINESS-WISE REVENUE BREAKUP ‘09
BUSINESSWISE REVENUE GROWTH ‘09
COMPETITIVE POSITIONING Other than Powerbrands, Reckitt Benckiser
has a variety of brands which are strong regionally (Ex: Dosia in laundry care, Veja in Surface Care)
Concentrates heavily on Laundry care, Surface care and Dishwashing products
Foothold in Emerging markets, 2nd in Brazil while Western Europe continues to be the largest market
Faces strong resistance in markets dominated by P&G and Unilever
Low Correlation with Equity markets and high Earnings growth vis-à-vis GDP growth makes RB an attractive target (Appendix A2)
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REGION-WISE REVENUE BREAKUP ‘09
REGION-WISE REVENUE GROWTH ‘09
RECENT ACTIVITY
Reckitt Benckiser has witnessed high growth in developing markets in HPC sector
20.35%
16.64%
10.87%
13.36%
26.80%
0.84%
7.58% 3.55%
Fabric Care
Surface Care
Dishwashing
Home care
Health & personal care
Other Household
Pharmaceuticals
Food
Source: RBG Annual Report and Equity research Reports
45%
28%
19%
8% Europe
North America & Australia
Developing markets
Pharma
2007 2008 20090%
5%
10%
15%
20%
25%
30%
Europe
North America & Australia
Developing Markets
Reckitt buys condom firm SSL for $3.8 bln
Rationale: Two new categories in over-the-counter
segment, namely condoms and foot care Expected cost synergies: £100 million 2 New Powerbrands to the list
Reckitt Benckiser acquires Paras Pharmaceuticals for $ 726 million
Rationale: Strong brands of Paras like Krack heel-care
lotion, D’cold remedy, SetWet hair gel, Dermicool prickly heat powder will enhance RB’s portfolio of powerbrands while strengthening its position in India
STRATEGIC OBJECTIVES
COMMENTS ALIGNMENT WITH RB
Cosmetics & Toiletries
Brand Focus
Emerging Markets
P&G to increase its focus on faster-growing, higher-margin Cosmetics & Toiletries businesses which utilize assets more efficiently
Beauty and personal Care are key targets as P&G shifts away from capital-intensive Paper and Food business
Beauty, Personal Care and Health care contribute 60% of the sales and profit growth for P&G
Reckitt Benckiser generates 27% of sales (highest contribution) through HPC
The business grew by 14% (second highest)
Reckitt Benckiser ranks 11 currently in Consumer health Care, up from 26 in 2005 while it maintained position 3 in Household segment
Expanding its portfolio in emerging world and increasing its contribution to sales & profits is a key strategy of Procter & Gamble
Cheer detergent, Boots Laboratories have undergone price-cutting to make them attractive to lower-income consumer
Though a challenge for Reckitt to garner a large market share in emerging markets with its late entry, it has shown an impressive growth of 25% last year.
BRIC countries are the top target markets for Reckitt Benckiser
In response to its poor 2009 financial year results, Procter & Gamble has heightened its focus on its core businesses and brands
In the process, it sold Folgers Coffee brand and Noxzema Skin Care line.
Launches primarily focused on Gillette, Olay, Crest, Oral-B portfolios.
90% of profits and sales of P&G come from 50 Leadership Brands
Focusing on establishing power brands in high-growth categories is Reckitt Benckiser’s key strategy in driving business growth.
Within its most dynamic Health & Personal Care division, Reckitt Benckiser continues to exploit growth opportunities for its Powerbrands such as Gaviscon, Lemsip, Nurofen, Clearasil as well as the latest addition, Mucinex.
70% of revenues of Reckitt Benckiser come from 17 Powerbrands
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RBG has similar revenue drivers as P&G as both compete for the same market
8
Source: Euromonitor and Datamonitor Reports
RBG: CONSUMER HEALTHP&G: CONSUMER HEALTH
0 10000 20000 30000 40000 50000 600000.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%
Australasia
Middle East and Africa
Eastern Europe
Latin America
North America
Asia Pacific
Western Europe
Market Size
CAGR
200
4-10
0 10000 20000 30000 40000 50000 600000.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%
Australasia
Middle East and Africa
Eastern Europe
Latin America
North America
Asia Pacific
Western Europe
Market Size
CAGR
200
4-10
0 10000 20000 30000 40000 50000 600000.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%
Australasia
Middle East and Africa
Eastern Europe
Latin America
North America
Asia Pacific
Western Europe
Market Size
CAGR
200
4-10
0 10000 20000 30000 40000 50000 600000.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%
Australasia
Middle East and Africa
Eastern Europe
Latin America
North America
Asia Pacific
Western Europe
Market Size
CAGR
200
4-10
P&G on-the-ground Operations
RB on-the-ground Operations
On-the-ground Operations common to both the organizations
High growth markets for RB with a CAGR of 10%
High RB % Company share with an average of 35%
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9Reaching more consumers in more parts of the world…
Source: Company websites and Annual reports
Bubble size shows company share of category, range displayed: 3.3 to 24%.
Bubble size shows company share of category, range displayed: 0.2 to 38.3%.
Opportunity for P&G
Bubble size shows company share of category, range displayed: 0.3 to 2.5%.
Bubble size shows company share of category, range displayed: 0.2 to 5.7%.
Opportunity for P&G
P&G: HOME CARE RBG: HOME CARE
Fabric Care
#1 in fabric treatment and water softener categories & #2 in garment care
Sales: US $1750 million
Principal Markets: UK, Italy, Scandinavia, Australia, Ireland, New Zealand, Japan and Korea
POWERBRANDS
COMMENTARY
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10Reaching more consumers more completely…
Source: RBG Annual report, Datamonitor Research Reports and Investor Presentations
Surface Care
#1 in Surface Care
Sales: US $1350 million
Principal Markets: UK, Italy, Scandinavia, Australia, Ireland, New Zealand, Japan and Korea
Dishwashing
#1 in automatic dishwashing, RB continuously increasing investments to tap the market
Sales: US $775 million
Principal Markets: North America, South America, Asia Pacific, South Asia
0 10000 20000 30000 40000 50000 60000 700000
0.5
1
1.5
2
2.5
3
Insecticides
Laundry Care
Surface Care
Air Care Toilet Care
Bleach
Dishwashing
Polishes
Market Size
CAGR
200
4-10
Bubble size shows company share of category, range displayed: 3.2 -19%.
0 10000 20000 30000 40000 50000 60000 700000
0.5
1
1.5
2
2.5
3Insecticides Laundry Care
Surface Care
Air Care
Toilet Care
Bleach
Dishwashing
Polishes
Market Size
CAGR
200
4-10
Bubble size shows company share of category, range displayed: 0.1 -27%.
Opportunity for P&GRBG: HOME CARE
P&G: HOME CARE
POWERBRANDS
COMMENTARY
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11Reaching more consumers more completely…
Source: RBG Annual report, Datamonitor Research Reports and Investor Presentations
Home Care
Leader in Air Care, Pest Control, Shoe Care
Sales: US $675 million
Principal Markets: UK, Russia, Korea, Spain, Italy, Germany, Australia, Poland, Turkey
Health & Personal Care
Strepsils #1 brand in sore throat
Sales: US $550 million
Principal Markets: France, Turkey, Germany, Russia, Italy, Spain, UK, Greece, Belgium, Switzerland, Italy
Food
French’s Mustard is #1 brand among its competitors
Sales: US $450 million
Principal Markets: Africa & Middle East, Asia Pacific, Europe, Latin America
0 10000 20000 30000 40000 50000 60000 70000 800000
0.5
1
1.5
2
2.5
3
3.5
Adult Mouth Care
Eye Care
Child Specific
Digestive remedies
Skin care Analgesics
Cough, cold and allergies
Herbal ProductsVitamins and
dietery supple-ments
Market Size
CAGR
200
4-10
Bubble size shows company share of category, range displayed 0.2 - 5.8%.
0 5000 10000 15000 20000 25000 300000
0.5
1
1.5
2
2.5
3
3.5
Adult Mouth Care
Eye Care
Child Specific Digestive remedies
Skin care
Analgesics
Cough, cold and allergies
Market Size
CAGR
200
4-10
Bubble size shows company share of category, range displayed: 1.6 - 4.4%.
Opportunity for P&G
RBG: CONSUMER HEALTH
P&G : CONSUMER HEALTH
1) Growth in Sales Revenue assumed at 6.00% (As per JPMC research reports) for the period 2013 and further
2) Terminal Growth Rate assumed at 2.00% on the basis of the following factors incorporated:
Weakening of dollar and euro against sterling
High raw material costs Weak consumer demand in US and UK Heightened competition
3) EBIT Margin assumed to grow by the following phases:
2013-2014: 24.0% 2015-2016: 24.5% 2017-2018: 25.0%
4) Depreciation as a % of Sales Revenue kept at 2%
5) WACC Calculation: Rf: 4.75% (Bloomberg) Beta: 0.611 (Bloomberg) Risk Premium: 7.48% (Wall Street
Research) Effective Tax Rate for RBG: 25% Cost of Debt: 5.11%
Based on the variability in assuming a forecasted terminal growth rate and WACC, we have considered the following:
1. WACC increments by 35bps
2. Terminal growth increments by 75 bps
Terminal Growth Rate
1.25% 2.00% 2.75%
WACC
8.59% £37.25 £39.9 £43.22
8.94% £36.07 £38.5 £41.46
9.29% £34.98 £37.2 £39.88
9.64% £33.97 £36.00 £38.44
9.99% £33.03 £34.9 £37.13
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DCF estimates the value based on forecasts of fundamental conditions: £37.18 per share
Source: Annual Report, J.P. Morgan Equity Research Report, Thomson Reuters and Company Website
KEY ASSUMPTIONS SENSITIVITY ANALYSIS
12
COMPARABLES TRADING DATA
VALUATION1) Lines of Business
2) Geographical presence
3) EBIT Margin
4) ROE/ROCE
Company Market
cap (US$mm)
EV/ Revenue EV/EBITDA P/E Margins (%)
2010E 2010E 2010E EBITDA EBIT ROE ROCE
Alberto-Culver 3,146 1.90 11.30 19.00 15% 14% 11.90% 10.50%
Henkel AG & Co. KGaA Nvtg 20,358 1.30 8.90 14.20 12% 9% 12.50% 7.17%
Colgate-Palmolive 37,659 2.60 9.70 15.40 26% 24% 88.90% 30.97%
Unilever N.V. 82,230 1.60 9.80 14.90 17% 15% 34.79% 16.23%
Procter & Gamble 176,352 2.60 10.30 14.70 24% 20% 17.64% 10.56%
Reckitt Benckiser Group 36,224 3.00 11.40 14.80 26% 25% 39.81% 27.46% Mean 2.00 10.00 15.64Min 1.30 8.90 14.20Max 2.60 11.30 19.00
All Figures in £EV/Revenue EV/EBITDA
Min Mean Max Min Mean MaxComparable Range 1.30x 2.00x 2.60x 8.90x 10.00 11.30x
Revenue 2010E (mn) £8,192.00 £8,192.00 £8,192.00 NAEBITDA 2010E (mn) NA £2,102.00 £2,102.00 £2,102.00Implied Firm Value (mn) £10,649.60 £16,384.00 £21,299.20 £18,707.80 £21,020.00 £23,752.60
Total Debt (mn) £136.00 £136.00 £136.00 £136.00 £136.00 £136.00
Implied Equity Value (mn) £10,513.60 £16,248.00 £21,163.20 £18,571.80 £20,884.00 £23,616.60
Shares Outstanding (mn) 728.17 728.17 728.17 728.17 728.17 728.17
Implied Share Price £14.44 £22.31 £29.06 £25.50 £28.68 £32.43
Take Over Premium 20.0% 25.0% 30.0% 20.0% 25.0% 30.0%
Per Share Value £17.33 £27.89 £37.78 £30.61 £35.85 £42.16
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data: £27.89 - £35.85 per share
SELECTION CRITERIA1
Source: J.P. Morgan Equity Research reports, Datamonitor Reports and Thomson Reuters1In the order of priority
SELECTION CRITERIAThe transactions have been chosen on the basis of:
1) Line of business of the target
2) Date of the transaction
3) Size of the transaction
Date Target Major Business Activity Acquirer Firm Value (US$mm)
FV/ Revenue (x)
FV/ EBITDA (x)
May-10 Smashbox Cosmetic and Beauty Estee Lauder 2,501 2.6 16.0 Jan-10 Bare Escentuals Cosmetic and Beauty Shiseido 1,700 3.1 10.3 Sep-09 Sara Lee (Personal care business) Personal care Unilever 1,874 1.7 10.0 Jun-08 Clarins Cosmetic and Beauty Financiere FC 3,883 2.4 16.7 Oct-07 Burt's Bees Beauty and Personal Care Clorox 925 5.4 18.1 Jul-07 Playtex Personal care Energizer 1,880 2.5 13.6 Jan-05 Gillette Mens Grooming P&G 57,602 5.8 19.2Mean 3.4 14.8Min 1.7 10.0Max 5.8 19.2
FV/Revenue FV/EBITDA
Min Mean Max Min Mean Max
Comparable Range 1.70x 3.36x 5.80x 10.00x 14.84 19.20x
Revenue 2010E (mn) £8,192.00 £8,192.00 £8,192.00 NA
EBITDA 2010E (mn) NA £2,102.00 £2,102.00 £2,102.00
Implied Firm Value (mn) £13,926.40 £27,501.71 £47,513.60 £21,020.00 £31,199.69 £40,358.40
Total Debt (mn) £136.00 £136.00 £136.00 £136.00 £136.00 £136.00
Implied Equity Value (mn) £13,790.40 £27,365.71 £47,377.60 £20,884.00 £31,063.69 £40,222.40
Shares Outstanding (mn) 728.17 728.17 728.17 728.17 728.17 728.17
Per share value £18.94 £37.58 £65.06 £28.68 £42.66 £55.24
VALUATION
COMPARABLE TRANSACTION DATA
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S14Transaction comparables method derives value from recent
prices for actual deals: £37.58 - £42.66 per share
Source: J.P. Morgan Equity Research reports and Bloomberg
£10.00 £20.00 £30.00 £40.00 £50.00 £60.00 £70.00
£33.03
£18.94
£28.68
£17.33
£30.61
£28.50
£43.22
£65.06
£55.24
£37.78
£42.16
£36.55
Share Price as on 31st August 2010 £35.41
Stock Price Range
£33.03 £ 37.78
Trading Comparables(EV/EBITDA)
Trading Comparables(EV/Sales)
Transaction Comparables(EV/EBITDA)
Discounted Cash Flow
Transaction Comparables
(EV/Sales)
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Y15
Represents the 52 Week High-Low
WACC ranges of 8.59%-9.99% Terminal Growth rates of 1.25%-2.75%
Based on 8.90x EBITDA multiple for low end and for 11.30x high end
Based on 1.3x Sales multiple for low end and for 2.6x high end
Based on 10x EBITDA multiple for low end and 19.2x for high end
Based on 1.7x Sales multiple for low end and 5.8x for high end
Implied Value per Share: £35.41 per share
Geographical Reach:
Higher revenues for the combined entity as both the firms get access to regions not targeted earlier
P&G will have access to high growth expected regions in Africa whereas Reckitt Benckiser will get to leverage upon a high distribution network of P&G
Cross-Selling:
Even in existing markets, both the companies will have the opportunity to cross-sell different products to newly acquired customers
P&G’s 22 Leadership Brands and Reckitt Benckiser’s 17 Power Brands will witness a boost in growth
Expected Revenue Synergies upto 4% by 2016
REVENUE SYNERGIES Sourcing Costs:
With a higher amount of Raw Materials procured, the combined entity will have a higher bargaining power against its suppliers
Having production facilities in countries having access to cheaper raw materials in emerging countries will also play a key role in reducing costs
SG&A Expenses:
The distribution, marketing and administrative spend will reduce as number of employees reduce and advertising expenses related to direct competing brands lower
R&D Expenses:
Capital Expenses related to R&D will reduce as both the companies will now share the same facilities
Expected Cost Synergies upto 2% by 2016
COST SYNERGIES Product Cannibalization:
Some of the brands of the combined entity might have to be discontinued due to direct competition against each other
The consumers unhappy with any of the two companies might refrain from using any product of the combined entity
Expected Negative Synergies upto 2%
NEGATIVE SYNERGIES
Present Value of Post-tax synergies expected to be realized over a period of 6 years from 2011 to 2016 : £4,667 mnVA
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S16Valuation of Synergies
Source: Equity Research reports and Annual reports
Summary (in £mn)
£3,292
£4,667£1,340
£998 £77 (£1,038)
Bid Price: £33.03Deal Value: £ 23,836 mnGain: £6,398mn
Bid Price: £37.53Deal Value: £ 27,543 mnGain: £2,691 mn
Bid Price: £41.23Deal Value: £30,234mnGain: £0
Bid Price: £46.25Deal Value: £33,892mnLoss: £ 3,658mn
Bid Price: £50.25Deal Value: £36,805 mnLoss: £6,571mn
Value Band
Deal Anatomy (in £mn)
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17P&G can bid upto a maximum of £41.23 (30% premium) where
value creation ceases to exist
Equity Value Net Debt Synergies Maximum Value
25782.506659982
30234.4746590793
(215)
4,667
Bid Price (£)
Premium/Discount
Exchange Ratio
Deal Structure >= 3.67 >16.87% < 1.68 x
Deal Price (£) Equity Cash Debt EPS ($) ROE Net
Debt/EBITDA
33.03 3.54%
0.88:1
23,836
100% 0% 0% 3.73 18.66% 0.81
0.35:1 40% 40% 20% 3.88 19.41% 1.14
0.13:1 15% 25% 60% 3.90 19.51% 1.81
35.41 11.00%
0.95:1
25,569
100% 0% 0% 3.68 18.41% 0.81
0.57:1 60% 20% 20% 3.77 18.85% 1.17
0.38:1 40% 20% 40% 3.80 19.01% 1.53
0.19:1 20% 20% 60% 3.84 19.18% 1.89
37.78 18.43%
0.61:1
27,295
60% 10% 30% 3.70 18.52% 1.38
0.50:1 50% 20% 30% 3.74 18.69% 1.38
0 0% 0% 100% 3.79 18.93% 2.73
45 41.07%
0.72:1
32,553
60% 20% 20% 3.58 17.91% 1.27
0.30:1 25% 40% 35% 3.68 18.41% 1.61
0.18:1 15% 10% 75% 3.63 18.16% 2.53
50 56.74% 0.13:1 36,194 10% 10% 80% 3.54 17.70% 2.85
P&G: STATISTICS1) Cost of Debt: 5.75%2) Existing debt: $29,832mn 3) Cash & Liquid assets: $18,782mn4) EPS (FY2010): $3.675) Share price: $59.406) Number of Shares outstanding: 3131
million
RBG: STATISTICS1) Share price: £31.92) Fully diluted shares outstanding:
728.17 million
ACQUISITION: STATISTICS1) EV of RB: £ 25,782 million2) Cost of Debt used for acquisition:
5.75% 3) FY10 P&G EPS: $3.674) FY10 P&G ROE: 16.87%5) FY10 P&G Net Debt/EBITDA:1.68x 6) Risk-free rate: 4.75% and effective
P&G tax-rate: 27.3% Recommendations: Bid-price of £ 35.41 with Equity-Cash-Debt structure as 60-20-20. It offers RBG a premium of 11.00% of its current market price with EPS accretion of 2.70%
Not viable Ideal form of financing Viable
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18Sensitivity Analysis of the Bid Structure
Source: Bloomberg and Factiva
DEAL STRUCTURE
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Financial
Regulatory and Legal
Human Resource Integration
Supply Chain Integration
Other Issues
Excessive use of leverage may inflate risk due to an increased pressure on management to service debt
Maintaining Reckitt Benckiser’s dividend payout ratio of 40%+ might be difficult in the initial years
Foreign exchange risk while consolidation of financial statements
Culturally different organizational structures and changes in managerial styles might breed anxiety among people currently working for Reckitt Benckiser
Harmonization of compensation and benefit plans, and leadership assessment and selection might pose an obstruction for
the overall integration
Laying off employees might invite opposition in countries where unionization is prevalent
Sourcing due-diligence, network issues like effectiveness of transportation management, inventory policies and reasonableness of inventory turns, right IT infrastructure for supply chain systems are significant issues that would need attention as the merger takes place
Anti-trust regulations for cross border transactions by the European commission, Clayton Act 1976 and Hart-Scott-Rodino Antitrust Improvements Act of 1976 in US
P&G might face delay or issues in seeking approval from its shareholders to gain a controlling stake in Reckitt Benckiser
Other regulations related to taxation and accounting like stamp duty and Litigation in relation to M&A activity
Product cannibalization in most of the sub-segments of Surface and Fabric Care
Expected value may not be realized if merger takes longer than estimated duration
Cultural Integration might take longer than Operational & Financial Integration
Managerial The management of Reckitt Benckiser might pose a hindrance to the merger in which case Hostile Merger may be considered which has its own issues
Source: Annual Reports and Company website
(Appendix A3)
(Appendix A4)
Colgate Palmolive is the next best alternative due to its strategic fit with P&G
Companies Business Financials Valuation Rating
Present in Oral care, bath & shower, hair care, deodorants, men’s grooming, baby care segments. Leader in Oral Care with 24% share
ROE – 82.24%ROCE – 30.19%Revenue growth - (0.02%)PAT growth – 19.39%
P/E – 17.95EV/Sales – 2.6EV/EBITDA – 9.7Mkt Cap - $37,659 mn
Manufactures, distributes and markets Personal care, household cleaning, OTC healthcare products and food products
ROE - 12.27%ROCE - 10.78%Revenue growth- 11%PAT growth - 30.68%
P/E - 23.95EV/Sales - 1.9EV/EBITDA - 11.3Mkt Cap - $3,146 mn
Mainly caters to Beauty and Personal Care and has high presence in emerging markets (65%)
ROE - 15.29%ROCE - 8.76%Revenue growth - 5.75%PAT growth - 32%
P/E - 19.01EV/Sales - 1.13EV/EBITDA - 9.3Mkt Cap - $13,597 mn
Present in household, personal care and specialty products.
ROE – 16.45%ROCE – 10.56%Revenue growth- 4.07%PAT growth – 22.61%
P/E – 16.76EV/Sales – 1.8EV/EBITDA – 8.5Mkt Cap - $4,387 mn
Portfolio consists of Skin Care – 39%, Make Up -39%, Fragrance – 16%, Hair Care– 6% with an overall mkt share of 3.1% in BPC
ROE – 26.73%ROCE – 13.63%Revenue growth – 6.44%PAT growth – 115.73%
P/E – 26.94EV/Sales – 1.73EV/EBITDA – 9.01Mkt Cap - $10,461 mn
Main businesses are Adhesives, Laundry & Home Care, Cosmetics & Toiletries
ROE – 15.29%ROCE – 8.76%Revenue growth - (3.95%)PAT growth – (50.67%)
P/E – 19.01EV/Sales – 1.3EV/EBITDA – 8.9Mkt Cap - $20,358 mn
Leader in cosmetics and beauty : make-up, coloration, fragrances with 23 global brands and in 130 countries
ROE – 26.73%ROCE – 13.63%Revenue growth-(0.39%)PAT growth – (6.89%)
P/E – 24.65EV/Sales – 2.71EV/EBITDA – 14Mkt Cap - $65,223 mn
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(Appendix A5)Source: Bloomberg, Euromonitor and Company website
Thank You
Appendix
2006 2007 2008 2009 2010
Jul 10:Ambi Pur unit of Sara Lee Corp
USD 471mn
May 10:Natura Pet Products Inc, a Davis-based producer and wholesaler of pet foods
Jun 09:The Art of Shaving, an Aventura-based retailer of razors and shaving products.
USD 60 mn
Jul10:INTERBRANDS acquired the entire share capital of Wella Romania Srl(wella)
May 10:Hamco Inc acquired the Bibsters product line of P&G
Oct 09:Warner Chilcott acquired P&G Pharmaceuticals Inc
USD 3.1bn
Mar 09:Helen of Troy LP acquired the hair- care business of P&G
Jun 09:Zirh International Corp, high-end men's grooming brand
Mar 09:RCJP Acquisition Inc acquired Johnson Products Inc, manufacturer & wholesaler of hair care products
Sep 08:NIOXIN Research Laboratories Inc, a manufacturer of hair care products
USD 300 mn
Sep 08:Alberto-Culver Co acquired the Noxzema skin care brand of Procter
USD 81mn
Apr 08:Reckitt Benckiser Japan acqd the medicated soap Muse business
Mar 08:Frederic Fekkai Inc, an owner and operator of beauty salons
Jan 07:`HDS Cosmetic Lab Inc, doing business as Doctor's Dermatological Formula
Dec 06:Minority stake in MDVIP Inc, a provider of concierge medicine program services
Jan 06:Gillette India Ltd, a shavers and razors manufacturer
USD 57 bn
Aug 07:Daio Paper Corp acquired the disposable adult diaper business
Sep 07:Svenska Cellulosa AB of Sweden acquired the European tissue operations
USD 672 mn
Sep 06:Innovative Brands LLC acquired the Sure deodorant product line
May 06:Softbank Venture Korea acquired the Ssangyong Kraft paper business
USD 120 mn
May 06:Dial Corp, a unit of Henkel KGaA, acquired the deodorant brands assets of Gillette USD 420 mn
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SP&G is strongly focusing on capturing market in all the segments of HPC sector
A1
Source: P&G Annual reports and EIUBack
2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
5
10
15
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25
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World GDP Growth Rate Earnings Growth Rate
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
FTSE 100 Earnings Growth Rate
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2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.00
5.00
10.00
15.00
20.00
25.00
30.00
0
0.5
1
1.5
2
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3
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Earnings Growth Rate Inflation Growth Rate
2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.00
5.00
10.00
15.00
20.00
25.00
30.00
0.615
0.62
0.625
0.63
0.635
0.64
Earnings Growth Rate Direct Exchange Rate
Source: Bloomberg and EIU
EARNINGS SENSITIVITY TO INFLATION
EARNINGS SENSITIVITY TO GDP GROWTH RATE
EARNINGS SENSITIVITY TO EQUITY MARKETS
EARNINGS SENSITIVITY TO EXCHANGE RATE
A2
Back
Indicative timetable according to City Takeover Code
1 2 3 4 5 6 7 8 9 10 11 12 13 14Week
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Announcement by P&G of intention to bid for target
Last day for posting of offer document
Last day for posting RBG’s written response to the offer
REGULATORS1) The Takeover Panel (Panel)2) The Financial Services Authority
(FSA)3) Alternative Investment Market (AIM)4) The Office of Fair Trading (OFT) and
Competition Commission5) Federal and State laws for US
DISCLOSURE REQUIREMENT1) Acquisitions of 3% or more of a
public company's voting shares must be notified to the target
2) A listed target must make this information public by the end of the business day following the offer
3) Notify the acquisition to the SEC within 10 days
COMMITTED FUNDING REQUIREMENT1) The consideration in cash in a bank
account
2) A right to borrow the consideration in cash, under a specially tailored loan facility, with no default allowed
Last Day for RBG to announce new material information
First Day for which offer may close
2 weeks 4 weeks 2 weeks
Accepting RBG’s shareholders may withdraw their acceptances
Last day for offer to be declared unconditional as to acceptances
Last day for paying the offer consideration to target shareholders
THRESHOLDS30% 30 per cent Mandatory offer triggered (Rule 9). Restrictions in Rule 5 of the City Code relevant. If
offerer has interest of between 30 per cent and 50 per cent (usually as a result of an unsuccessful previous offer) mandatory offer triggered if any further interest acquired.
50% 50 per cent Minimum acceptance condition under the City Code. Control effectively passes.
90% 90 per cent Enables compulsory acquisition of remaining 10 per cent.
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Defense mechanism that might be employed by RBG post P&G’s bid for acquisition
Defense strategy Action Pros Cons
Litigation Targets files a lawsuit against the acquirer that will require expensive and time-consuming legal efforts to fight
Courts may disallow the transaction and the target may get enough time to prepare itself
Involves high cost of litigation
Greenmail Target repurchases its shares from the acquiring company at a premium to the market price
Usually accompanied by 2nd agreement that acquirer will not make another attempt for defined period
50% tax on profits realized by acquirer makes it less attractive
Share repurchase Target submits a tender offer for its own shares forcing the acquirer to raise its bid price or quit
Assures a good price for the target
Highly leveraged capital structure may not be desirable to the target
Crown jewel defense Target decides to sell a subsidiary or major asset to neutral third party
The acquirer moves away if the asset was important
Courts may declare it illegal
Pac-man defense The target makes a counteroffer to acquire the acquirer
The acquirer fends off immediately with the fear of getting acquired
Hardly used as smaller company rarely successfully acquires a larger company
White knight defense Target seeks a friendly third party that can justify higher price than hostile acquirer
Starts a bidding war and the target ultimately gets a good price
The white knight may turn out to be a villain!
White squire defense Target seeks a friendly third party that can acquire a minority stake in the target
Minority stake is big enough to block the acquirer from gaining enough share
High risk of litigation
A4
Back
Other alternatives…O
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BUSINESS DESCRIPTION KEY FINANCIALS
STRATEGIC FIT WITH P&G
• Headquartered in USA, Alberto-Culver manufactures, distributes and markets Personal care, household cleaning, OTC healthcare products and food products
• 57% of its business comes from NA while Europe is another major market
• Hair Care has a share of 76% in its sales
• Major Brands include TRESemmé, Nexxus, Alberto VO5 & St. Ives
Financial Performance• ROE - 12.27%• ROCE - 10.78%• D/E – 0.11• Revenue growth- 11%• PAT growth - 30.68%
Valuation Parameters• P/E - 23.95• EV/Sales - 1.9• EV/EBITDA - 11.3• Mkt Cap - $3,146 mn
• Staling Brands, Low presence in Emerging mkts, Strong Impact due to high exposure to Retail Majors like WalMart and dispute with P&G over Noxzema doesn’t make it a good choice
• Low debt- financially attractive
• Beiersdorf has high presence in emerging markets (65%)
• Mainly caters to Beauty and Personal Care (3% market share)
• New Product development alongwith new category and regional expansion are the growth drivers
• Enjoys strong brand loyalty with Nivea, Eucerin and La Prairie
• Losing market share in Germany & WE
Financial Performance• ROE - 15.29%• ROCE - 8.76%• D/E – 0.06• Revenue growth - 5.75%• PAT growth - 32%
Valuation Parameters• P/E - 19.01• EV/Sales - 1.13• EV/EBITDA - 9.3• Mkt Cap - $13,597 mn
• Too reliant on Nivea, while exclusive La Prairie has a stiff competition with Pvt. Label brands
• Overall BPC portfolio – P&G being #1, there will be strong product cannibalism
• Large Skin Care portfolio & strong focus on fragrances –P&G is marginally better
A5
Source: Bloomberg, Euromonitor and Company website
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STRATEGIC FIT WITH P&G
• World BPC Value share – 0.2%, Home Care Value Share – 1%
• 78% of its sales come from US
• 80% of sales from 8”Power Brands”: Arm & Hammer, Trojan, Oxiclean, SpinBrush, First Response, Nair, Orajel and Xtra
• Offers a host of Eco-friendly prodcuts
• Improved its OPMs by 2.4% by cost cutting
Financial Performance• ROE – 16.45%• ROCE – 10.56%• D/E = 0.36• Revenue growth- 4.07%• PAT growth – 22.61%
Valuation Parameters• P/E – 16.76• EV/Sales – 1.8• EV/EBITDA – 8.5• Mkt Cap - $4,387 mn
• Although it has strong Power Brands, but all the RB’s or P&G’s brands in the same category are well ahead
• Going Green products have a good market and can help P&G gain a strong foothold
• Too reliant on Walmart (22%)
Other alternatives…
Financial Performance• ROE – 82.24%• ROCE – 30.19%• D/E – 1.27• Revenue growth -
(0.02%)• PAT growth – 19.39%
Valuation Parameters• P/E – 17.95• EV/Sales – 2.6• EV/EBITDA – 9.7• Mkt Cap - $37,659 mn
• P&G’s oral care product portfolio will get a boost and the combined entity will move to #1 position in oral care
• Strong presence in emerging markets fits well with P&G’s growth agenda
• Palmolive is world #3 in bath and shower and is also active in deodorants, haircare, men’s grooming & skin care
• Present in Oral care, bath and shower, hair care, deodorants, men’s grooming, baby care segments
• Market share in beauty and personal care remained static at nearly 4% in 2009
• Global leader in Oral Care with 24% global market share and contributing to 63% of firm revenues
• Dominates oral care segment of emerging countries such as Brazil, China and India with 44%, 26% and 38% market share respectively
A5
Source: Bloomberg, Euromonitor and Company website
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BUSINESS DESCRIPTION KEY FINANCIALS
STRATEGIC FIT WITH P&G
• Mainstream businesses: Adhesives – 47%, Laundry & Home Care – 31%, Cosmetics & Toiletries – 22%
• Mainly based out of WE & ME – 62%, NA – 19%, Asia Pacific – 13%, LA – 6% with an overall market share of 1.8%
• Major Brands – Schwarzkopf, Fa, Dial, Diadermine, Right Guard
• Has 203 production sites in 57 countries
Financial Performance• ROE – 15.29%• ROCE – 8.76%• D/E = 0.60• Revenue growth-(3.95%)• PAT growth – (50.67%)
Valuation Parameters• P/E – 19.01• EV/Sales – 1.3• EV/EBITDA – 8.9• Mkt Cap - $20,358 mn
• Except Schwarzkopf, none of the brands can be termed global
• Adhesives being the major business area doesn’t align with P&G
• With profits reducing to half, R&D might be affected
Other alternatives…
Financial Performance• ROE – 26.73%• ROCE – 13.63%• D/E – 0.58• Revenue growth – 6.44%• PAT growth – 115.73%
Valuation Parameters• P/E – 26.94• EV/Sales – 1.73• EV/EBITDA – 9.01• Mkt Cap - $10,461 mn
• Premium Fragrances, a leading area for Estee Lauder, expected to face stiff competition from mass fragrances
• Less conflicts with the existing brands of P&G expected; company’s strategy of expanding in emerging markets seems promising
• Though headquartered in New York, Estee Lauder’s revenue is not as highly skewed (US – 47%, Europe, ME – 36%, Asia - 17%)
• Portfolio consists of Skin Care – 39%, Make Up -39%, Fragrance – 16%, Hair Care– 6% with an overall mkt share of 3.1% in BPC
• Major Brands – Clinique (affordable), Mac, Bobbi Brown (premium)
• Retail distribution majorly through departmental stores (60%)
A5
Source: Bloomberg, Euromonitor and Company website
Financial Performance• ROE – 26.73%• ROCE – 13.63%• D/E – 0.218• Revenue growth-(0.39%)• PAT growth – (6.89%)
Valuation Parameters• P/E – 24.65• EV/Sales – 2.71• EV/EBITDA – 14• Mkt Cap - $65,223 mn
• Strong Emerging Market focus and multiple R&D facilities gel well with P&G strategy
• With current valuations, it would be an expensive investment
• Multiple shareowners might hinder or delay takeover process
• In terms of market share, L’Oreal ranks 2nd after P&G in BPC with 93% of business in Cosmetics
• Very strongly focused on expansion in emerging markets with an objective of doubling to 2.5 million subscribers. Currently, WE accounts for 44% business, NA- 24%, Rest – 32%
• Major Brands – Garnier, L’Oreal Paris, Lancome, Maybelline NY
Other alternatives…
BUSINESS DESCRIPTION KEY FINANCIALS
STRATEGIC FIT WITH P&G
A5
BackSource: Bloomberg, Euromonitor and Company website
