The deal 2010 iim indore bank_onus

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Performed due diligence and designed the deal structure for P&G and Reckitt merger for JPMC The Deal event

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The deal 2010 iim indore bank_onus

  1. 1. P&G’s acquisition of Reckitt BenckiserThe Deal 2010Campus: IIM IndoreTeam Name: BankOnUs Anshul Bansal | Anshuman Atri | Rahul Jain | Vaibhav Agarwal
  2. 2. Table of Contents Overview of HPC Market P&G - white space analysis and investment opportunities Reckitt Benckiser – an investment opportunity Key Risks & Growth Drivers Alternative investment opportunities Valuation Appendix
  3. 3. Global HPC market is dominated by few large players with a total market size ofUSD 541bn Global 5 Year 5 Year Market Share Dynamics Market Size Historical Expected 40% 36% (B$) CAGR CAGR Cosmetics Fragrances 39 5.8% 2.4% 30% Skin care 76 6.7% 2.7% 20% Color Cosmetics 44 5.1% 1.7% 20% Sun Care 8 8.7% 3.0% Total Cosmetics 166 6.2% 2.4% 10% 7% 6% 6% Toiletries 5% 3% 3% 3% 3% 2% 2% 2% Baby care 6 6.5% 3.1% 1% 1% 0% Bath and shower products 29 4.1% 1.3% Deodorants 17 6.4% 2.0% Depilatories 4 5.2% 1.4% Hair care 64 4.5% 1.6% Oral hygiene 34 4.4% 1.7% Mens grooming products 26 6.6% 2.4% Total Toiletries 179 5.0% 1.8% Total Cosmetics and Toiletries 260 5.5% 2.0% Disposable paper products Industry Sales Mix Hygiene Products 59 6.0% 3.7% 20% 19% Tissue Products 55 5.2% 3.0% Wipes 9 3.3% 1.9% 16% 13% Away-from home disposable products 19 4.4% 2.6% 12% 11% Total Disposable Paper Products 142 5.3% 3.2% 10% 10% Household care 8% 7% Air care 8 4.8% 2.0% 6% 6% 5% 5% Chlorine bleach 4 3.7% 0.6% 4% 3% 3% Dishwashing products 13 5.2% 2.3% 1% 1% 1% Laundry care 66 5.3% 2.2% 0% Surface care 18 4.0% 2.0% Toilet care 4 3.7% 1.7% Trash Bags 16 5.5% 3.5% Batteries 10 7.5% 3.4% Total Household Care 139 4.1% 2.0% Total Household and Personal Care 541 5.0% 2.3%Source: Credit Suisse Research 1
  4. 4. Developed Markets appear to be structurally impaired owing to SKUrationalization, decline in new store openings… SKU Rationalization Wal-Mart Annual Inventory Reduction • Retailer SKU rationalization and inventory reductions to 100% 9% 8% boost productivity & margins will impact HPC sector 80% 7% • Volume growth through “me-too” product launches will be 6% 60% difficult under current scenario 5% • Retail has moved to a pull-based model from a push- 40% 51% 70% 83% 100% 4% 3% based model to improve sales & lower costs 2% 20% • 32% Inventory levels at retail stores expected to decline by 15% 1% 100-200 basis points over the next few years, thereby 0% 0% 2009 2010 2011 2012 2013 2014 putting pressure on industry volume • Leading firms likely to benefit as other products exit % of Walmart Store Base Cumulative Inventory Reduction Lack of New Store Openings Retail Square Footage Growth • Store openings started to decline during the 2008-09 5% recession to preserve liquidity & improve returns • US retail store square footage increased by 2% in 2008 4% and 1% in 2009, pressuring industry sales by 0.5% - 1% • Given the uncertain economic conditions, store 3% bankruptcies & industry saturation, this trend is expected 2% to continue in the next few years • In W. Europe, retail square footage declined from 3% in 1% early 2000s to about 1% in 2009, with the trend expected to continue 0% • Limiting factors include growing elderly & immobile 2004 2005 2006 2007 2008 2009 2010E 2011E population, rising internet retail & restrictive legislation US Western EuropeSource: Credit Suisse Research; ING Research 2
  5. 5. … increasing Private Label penetration and structural changes in the industry Private Label/Trade-down Risk Private Label Penetration • Following recession, value has assumed an important 25% Europe US 20% role in purchasing decisions • Retailers prefer private labels as they provide margins 15% almost 50% higher than a branded product 10% • Private label share is much higher in Europe than US 5% • Due to low confidence, high unemployment, low credit 0% availability, savings rate for consumers has spiked to over 6% in 2009 after a dip to almost 0% in 2007 • For branded labels to avoid commoditization, it is essential to innovate and provide value-added features Future Implications for HPC industry HPC Industry Volume Growth • As a consequence of the above factors, the outlook for 4.0% Emerging Structural Issues: • SKU rationalization (1-2% impact) HPC growth remains weak in developed markets 3.5% • Lower store growth (0.5% impact) • While volumes are expected to recover slightly in 3.0% • Structural shift in consumer behavior to value 2010, growth beyond this temporary recovery is difficult 2.5% • Growth of private label offerings at • HPC sector is expected to grow at 1%-2% at best in the 2.0% retail next few years, below the 3%-4% levels pre-recession 1.5% • As a result, emerging market exposure is expected to 1.0% play a key role in determining the future margins 0.5% • Companies with higher exposure in the emerging 0.0% economies expected to do better than others Average (Last Decade) 2010-2011Source: Credit Suisse Research; ING Research 3
  6. 6. Table of Contents Overview of HPC Market P&G - white space analysis and investment opportunities Reckitt Benckiser – an investment opportunity Key Risks & Growth Drivers Alternative investment opportunities Valuation Appendix
  7. 7. P&G has experienced decline in organic growth over the last two years with itsSG&A expenses remaining constant over last ten years Organic Sales Growth Percentage Sales from Emerging Markets 9.0% 70% 60% 60% 52% 50% 45% 6.0% 37% 34% 40% 30% 30% 27% 30% 25% 3.0% 20% 15% 10% 4% 0.0% 0% 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Organic Sales Growth Avg Ogranic Growth 2-yr avg organic sales growth SG&A as %age of Sales • P&G’s organic sales growth has declined Declining organic over the last 13 quarters 90 32.1% 32.0%31.8% 33% sales growth • P&Gs organic sales growth is lower than 80 31.8% 31.7% 31.7% that of its peers 31.3% 32% 70 31.2% 60 31% • P&G’s emerging market exposure is much 30.0% 29.5% less as compared to its peers Emerging market USD Bn 50 40 30% exposure • Although the share has improved over the 30 29% years but growth has slowed down 20 28% • Despite revenue almost doubling P&G has 10 not been able to reduce SG&A as proportion 0 27% Higher proportion of sales over the last decade FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 of SG&A • P&G’s core SG&A (SG&A excluding R&D, Revenues (USD Bn) SG&A as % of Sales marketing, ESOPs etc.) is also above its peersSource: P&G Company Data; Credit Suisse Research; DB Research 4
  8. 8. There exists limited organic growth opportunity for P&G in developed countriesand thus it needs to grow through inorganic route… North America Western Europe Latin America Asia Pacific • Underpenetrated region, with potential to • Brazil and Mexico represent • Market leader in most of • Strong overall position expand number of categories P&G a large opportunity as P&G the 21 categories in with modest white space competes in from the following current competes in only 11 and 14 which it competes opportunity levels: Russia (16), China (12), India (8), categories, respectively. Philippines (7) and Indonesia (5). Skin Care • Skin Care represents the • Recently introduced Skin Care products in largest growth opportunity in India and Russia and anti-aging products • Leading market share in Beauty as P&G has presence • Growth opportunity in Brazil in Japan, Korea, China, Singapore and Face Cleansers, Creams • Opportunity to expand in only 50 countries. as P&G currently has no Malaysia and Lotions (30% share share. • Long-term whitespace presence. • Introducing Olay Pro-X in China vs. J&J with 27%). opportunity in hand and body • Olay Total Effects currently has a 6% lotions, although likely through share in India acquisition. • Leading market share in •Large opportunity with small • Top three players • Launching Crest Pro-Health in China. Oral Care manual toothbrushes in presence in Mexico (7%-10%) (Colgate, P&G, Glaxo • Placing a greater focus on expanding • Shares leading position in the U.S. (P&G 39%, CL and Brazil (launched Oral-B Smith Kline) each hold market share in Russia (20% share North America with Colgate, 33%). toothpaste in March 2009). approximately 20% of the • Opportunity to enter the Oral Care market but trails in developing • Market share for • Launch of Oral-B toothpaste market. in India markets. toothpaste is very close in Brazil is off to a strong • Launched Oral-B • #3 position in Australasia, ASEAN and • 15% market share in with Colgate (both have start (hold approximately a toothpaste in the Benelux India. developing markets. approximately 36% 20% market share in the region in March 2009. • #2 position in Greater China market share in the U.S.). Pharmacy channel). Diapers / Wipes • 35% market share in • #2 position in Australasia, ASEAN and developing markets India. • Strong global presence ; large • #1 position - Vertically • #1 position in Greater China (30% volume • #1 position in the U.S., opportunity as usage increases expanding portfolio • #2 position, lagging share). 47% market share in in developing markets (ex. In (recently launched lower Kimberly-Clark by a wide • Hold leading market share in India after disposable diapers vs. 1998, the disposable diaper tiered diapers in margin. entering the market two years ago. Kimberly-Clark with 37%. market in China totaled 3 mn Germany). • Opportunity to expand penetration in the cases/yr, vs. 50 mn cases in region as disposable diaper usage 2008 and projected 70 mn becomes more widespread. cases in 2009)Source: Credit Suisse Research; Team Research and Analysis 5
  9. 9. … while at the same time it can grow organically in the emerging markets North America Western Europe Latin America Asia Pacific • #2 position, with significant growth potential as market Feminine Care shares for the top three • Market share leader in sanitary • 30% market share in • #1 position, with a large gap leading companies (KMB, J&J • #2 position in Australasia, napkins in the U.S. with 50% developing markets. over the closest competitor and P&G) are in the low to mid ASEAN and India. market share, followed by J&J • Strong global presence but (J&J). 20% range. • #1 position in Greater China. and KMB with 18% shares. large usage opportunity • Growth opportunity through expansion of value offerings (recently launched Naturella). Fabric Care • 25% market share in developing markets. • Greater China - #1, Australia, • #1 position, leading by a wide • Well developed globally - ASEAN and India - #2 behind margin in liquid laundry • #1 position, with a large gap biggest opportunity in India. Unilever. detergents in the U.S. (P&G - over the closest competitors • #2 position behind Unilever. • Expanding into laundry - Large opportunity in India 60% market share vs. Vastar (Henkel and Unilever). additives. Already participate where Unilever currently has Capital Partners with 15%). in 15 countries and plan to the largest market share. enter 18 new markets in the following 18 months. Hair Care • Potential for growth in hair styling products where • #1 position in the region by a penetration levels are slight margin - market shares significantly below that of of leading companies • Shampoo market share in the • P&G #2 position • Australasia, ASEAN and India shampoos and conditioners. (Unilever, P&G and LOreal) U.S.: P&G (38%), LOreal • 19% market share vs. LOreal -#2 • 34% market share in are all in the high teens. (13%). with 33%. • Greater China - #1 position developing markets in • Large opportunity to expand shampoo. presence in Brazil (7%-8% • Strong geographic presence market share). with distribution in approximately 150 countries. Index Small Opportunity Large OpportunitySource: Credit Suisse Research; Team Research and Analysis 6
  10. 10. Table of Contents Overview of HPC Market P&G - white space analysis and investment opportunities Reckitt Benckiser – an investment opportunity Key Risks & Growth Drivers Alternative investment opportunities Valuation Appendix
  11. 11. P&G Investment Opportunity Heat Map – U.S. Market US Companies P&G Colgate Kimberly Chlorox Organic growth steady - improving Organic growth likely to value proposition (selectively cutting decelerate in 2010 as Accelerating organic growth Organic growth projected flat to price and expanding into lower tier) company laps last years price Organic growth likely steady profile down pursuing emerging markets white increases - upside to space and strong innovation pipeline expectations limited Emerging Markets Exposure 34% 40-45% 30% 15% Leading brands in many of its Global leader in Oral Care with Market leader in many of its disposable paper products Market leader in many core Brand Strength (% of #1 / #2 dominant shares in most categories (80% of U.S. sales from #1 portfolio (80% of U.S. Personal categories (80% of U.S. sales from Brands in the U.S.) countries. Less strength in or #2 brands. Care and Consumer Tissue #1 or #2 brands. Personal Care and Home Care sales from #1 or #2 brands). Underlying Category Growth 2.30% 1.90% 3.40% 1.70% Private label overlap Low Low Moderate High Mildly innovative historically with Most innovative company in the HPC Innovative in lower profile successes in trash bags (Force sector. History includes massive wins Multiple successes in Oral Innovation categories. Technology leader in Flex) disinfectant wipes charcoal in Detergents, Diapers and Care including Total toothpaste Diapers. and natural home care (Green Toothpaste. Works). Firmly entrenched as the premium Best positioned as the Average price point is 11% Average price point is 10% above player in most of the categories in company competes in lower above category average category average driven by Exposure to Lower/Middle which it competes. (Average price price point categories and its primarily driven by higher price categories with high exposure to Tier of Mass Channels point is 16% above the industry average price point is 11% points in Diapers and Toilet private label (charcoal cat litter and average). below the category average. Tissue. trash bags). Sales ranging from $15-$80B and presence in over 150 countries provide significant scale and distinct Strong relative scale in its Scale advantages including better leverage with retailers lower sourcing costs more resources for R&D larger categories. Technology its large cap advertising budgets and funds to protect share from new competitors. peers. CS Projects EPS Growth of 11-12% CS EPS growth rate of 10% is CS projects 7% EPS growth in CS EPS growth rate of 7-9% below Potential Upside Expectations vs. consensus of 10% in line with consensus line with consensus consensus of 9-11% Index Worst Positioned Best PositionedSource: Team Research and Analysis 7
  12. 12. P&G Investment Opportunity Heat Map – European Market European Companies Unilever Reckitt Benckiser Beiersdorf Henkel Organic growth rate stable Organic growth will be likely Accelerating organic growth Going forward, organic growth likely Organic growth likely to be plateau and may pick up in coming steady as weak consumer will profile to increase and then decelerate years keep earnings growth in check Emerging Markets Exposure 50% 27% 41% 14% Leading skin care company in European Market. Nivea is a Leading Home and Personal Has leading brands in washing Brand Strength (% of #1 / #2 Market leader in many of its value for money brand in Care company with 17 power powder, dishwashing liquid/tablets Brands in the Europe) categories Europe generates brands and adhesives categories approximately 75% of profits for Beiersdorf. Underlying Category Growth 3.50% 5% 1.20% 6.50% Private label overlap Moderate Low Low Moderate Innovation High High Moderate High Exposure to Lower/Middle Due to wide product range, it has Premium positioning results Value for money positioning Moderate exposure Tier of Mass Channels exposure to lower/middle Tier in low exposure provides moderate exposure Strong scale in Developed Low to moderate scale of Large scale operation spanning Strong scale in skin care but Scale market with renewed interest operating with main focus on across the globe mostly Europe oriented in developing markets Western Europe Potential Upside EPS growth level expected is 21% EPS growth level 13% EPS growth level expected 19% EPS growth level expected Expectations negative expected due to lower base Index Worst Positioned Best Positioned • Reckitt Benckiser and P&G follow similar strategy of unrelenting focus on innovation for development of new product  RB has had a consistent organic growth of over 5% while most companies failed to beat forecast  OTC segment of RB will help P&G enter into one of the fastest growing segment which it had divested earlier • Colgate will strengthen its position in emerging markets and make P&G the worldwide market leader in oral care • Beiersdorf and P&G combined will become leader in Skin Care category in all but one (France) of Western Europe & USSource: Team Research and Analysis 8
  13. 13. Reckitt Benckiser: An Opportunity - Organic Growth better than most and tradingwell below its peers Two year Average Organic Growth for Reckitt & its Peers Relatively Underpriced When Compared to its peers 9% 19 Beiersdorf 8% 18 L’Oreal 7% 17 Colgate 6% 16 Average Church & 5% Dwight 2011e PE 15 P&G 4% Reckitt 14 Clorox 3% Benckiser 13 2% 12 Henkel 1% 11 0% 10 Colgate Reckitt Henkel Beiersdorf Clorox P&G Benckiser Consumer Consumer 10 12 14 16 18 20 22 Q109 Q209 Q309 Q409 Q110 Q210 2010e PE • Reckitt has achieved an organic growth rate much higher than most of its peers in the last 6 quarters • It has grown at a consistent rate of ~5% per annum, when its peers have been decelerating • Moreover, Reckitt has managed to achieve this growth on a much stronger base from 2009 than most of its peers who had relatively weaker bases • P&G has witnessed stunted organic growth during this time • Reckitt, by virtue of it competing with P&G across fewer segments than most of the peers, is an attractive target • Reckitt is trading well below its peers despite superior top line growth profileSource: Morgan Stanley Research; Team Research and Analysis 9
  14. 14. Reckitt Benckiser acquisition will give access to air care market while indishwashing, laundry market… Dishwashing Combined Share Air Care Combined Share 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Unilever Henkel P&G RB Henkel SC Johnson P&G RB Laundry Combined Share • In Dishwashing category, combined share of these 70% two companies makes them market leader in all 60% regions except Middle East & Africa 50% • In Air Care segment, Reckitt Benckiser will provide 40% 30% P&G substantial market share across all regions. 20% Currently P&G has limited presence in this segment 10% with main focus on North America 0% • In Laundry segment, P&G is market leader in most of the regions but Reckitt will provide 13% market share in Australasia where P&G currently has little or no Unilever Henkel P&G RB presenceSource: Euromonitor; Team Research and Analysis 10
  15. 15. … surface care, toilet care and polish market, it will lead the market across globe Surface Care Combined Share Toilet Care Combined Share 60.0% 70% 50.0% 60% 50% 40.0% 40% 30.0% 30% 20.0% 20% 10.0% 10% 0.0% 0% World Asia Pacific Australasia E. Europe Latin M. East & N. America W. Europe World Asia Pacific Australasia E. Europe Latin M. East & N. America W. Europe America Africa America Africa P&G RB Unilever SC Johnson Henkel P&G RB Unilever Henkel SC Johnson Polishes Combined Share • In Polishes segment, P&G has no presence while 45% Reckitt has substantial presence across all regions 36% (top 2 in all markets) 27% • In Toilet Care segment, P&G has little or no presence 18% while Reckitt has 10+% market share in all the 9% regions with leadership position in North America 0% • In Surface Care segment, P&G and Reckitt combine will attain market leadership in most of the regions with over 36% market share in North America and Henkel SC Johnson P&G RB 25% share world wideSource: Euromonitor; Team Research and Analysis 11
  16. 16. P&G will be able to increase productivity of its R&D expenditure and will be ableto accelerate household penetration in developing markets R&D Expenditure Productivity • In Depilatories Category, both of them have substantial 2,500 market share across the regions. Combined entity will have 49% share world wide, 60% share in Western Total R&D (USD mn) 2,000 P&G Europe and 44% share in North America 1,500 Unilever • Looking at revenue generation per unit of R&D 1,000 L’Oreal expenditure, Reckitt (60$ Per R&D $) leads the pack. Beiersdorf Acquisition of Reckitt will help P&G (40$ per R&D $) to 500 Henkel make its R&D expenditure more productive and at the Reckitt same time it will provide Reckitt brands with more fund for 0 CLX 0 20,000 40,000 60,000 80,000 100,000 innovation Total Sales (USD mn) Reasons for Acquisitions • Sales growth due to complementary strengths in Depilatories Combined Share innovation and go-to-market capabilities 70% 60% • P&G will get 17 industry leading power brands of Reckitt 50% with substantial market share across regions 40% • Economies of scale will help reduce cost and increase 30% consumer value 20% • Reckitt acquisition will help P&G to consolidate market 10% 0% share in developed market and accelerate household penetration in developing market • Reckitt has had consistent organic growth over years • Both follow a culture of product uniqueness with focus on Henkel SC Johnson P&G RB innovation, distinctiveness & problem solvingSource: Euromonitor; Credit Suisse Research; Team Analysis 12
  17. 17. Reckitt’s margins are relatively immune to the macroeconomic factors Emerging Markets Europe 16% 16% 12% 30% 14% 14% 10% 25% 12% 12% 8% 10% 10% 6% 20% 8% 8% 4% 15% 2% 6% 6% 0% 10% 4% 4% -2% 2% 2% 5% -4% 0% 0% -6% 0% -2% -2% Margins Inflation GDP Margins Inflation GDP Americas 6.0% 30% • Margins are not impacted by macro economic factors 5.0% in emerging markets and Americas 25% • In fact in the emerging markets, the margins have 4.0% 3.0% 20% improved over the years 2.0% 15% • Margins in Europe are negatively correlated with 1.0% inflation while GDP growth has no effect 0.0% 10% • The principal drivers of market growth in all markets -1.0% 5% are the rate of household formation and growth in the -2.0% -3.0% 0% level of disposable income, combined with demand for new products that offer improved performance or greater convenience Margins Inflation GDPSource: Euromonitor; Morgan Stanley Research; Team Analysis 13
  18. 18. Table of Contents Overview of HPC Market P&G - white space analysis and investment opportunities Reckitt Benckiser – an investment opportunity Key Risks & Growth Drivers Alternative investment opportunities Valuation Appendix
  19. 19. The deal is subject to high legal risk due to the possibility of antitrust suits arisingout of dominant market share in various categories Key Risks Product & Market Currently both P&G and Reckitt mainly compete in home & personal care market in N. America and W. Europe and Overlap post merger positioning of respective brands needs to be considered Integration Risk Owing to large size & geographic spread, failure in integration will adversely affect the combined entity Cost of Integration The combined entity will incur signification transaction and integration charges Considering the cross border nature of deal, proportion or cash and stock deal needs to be considered and P&G Deal Structure needs to gauze the willingness of current share holders to accept stocks traded in another market Reckitt has substantial exposure to European market and Pound-Dollar fluctuation needs to be considered for both Currency Risk deal structure and also for operations Combined entity will gain market leadership in large number of categories with market share over 50% in few Legal Risk segments across the markets. This may trigger antitrust cases and the deal may not get executed ultimately Cost of Borrowing Acquisition may adversely impact P&G’s cost of borrowing if debt increases substantially Key Growth Drivers of Reckitt’s Revenues & Income • Reckitt invests larger portion of its revenue for marketing and R&D as compared to its peers. Focus on a small set of power brands helps it in quick development of innovative products & faster time to market • Company’s sales are significantly biased towards Western Europe (mature market with intense price competition) and this may weigh negatively on revenue growth • Focus on single brand (Mortein) insecticide marketing in developing market will help it increase market share and this will positively contribute to revenue growth. (In developing markets, health authorities and media have bolstered consumer awareness of insect-borne diseases) • Ability to generate new patents for drugs (Suboxone patent expiry will negatively impact the revenues from pharmaceuticals segment) • Owing to strong Free Cash Flow generation, Reckitt can go for inorganic growth (can spend up to £4B for acquisition) • Health care contribution to top line has increased from 13% in 2000 to 40% today. This segment has higher margin when compared to HPC category and SSL integration will act as a catalyst for next leg of growth of core businessSource: Team Analysis 14
  20. 20. Table of Contents Overview of HPC Market P&G - white space analysis and investment opportunities Reckitt Benckiser – an investment opportunity Key Risks & Growth Drivers Alternative investment opportunities Valuation Appendix
  21. 21. Colgate Palmolive – An Alternative (1/2) Combined Col-Pal P&G Market Share (%) Emerging Market Exposure 80 70 14% 19% 60 50 40 22% 30 45% 20 10 0 North America Europe/South Pacific Asia/Africa/Latin America Pet Nutrition Others P&G Colgate-Palmolive Emerging Market Growth – Col-Pal vs. HPC Rationale for acquiring Colgate-Palmolive 12% • Colgate-Palmolive is the worldwide leader in the Oral Care 10% 9.5% 9.6% 9.7% segment with P&G as No. 2. 8.0% 8.1% • Col-Pal has large emerging markets exposure - a segment 8% 7.5% 6.9% 6.7% expected to grow fastest in the near future 6% 5.3% 5.5% • The acquisition would give P&G a dominant share across the dental care categories and geographies 4% 2.7% • It would also lead to various revenue & cost synergies for 2% P&G since it will gain access to wider markets and 0.7% distribution networks 0% • Col-Pal has least exposure to private label market share 2005 2006 2007 2008 2009 2010-12E (10.5%) among all its peers, thus shielding it from down- HPC Emerging Market Growth Colgate Emerging Market Growth trade riskSource: Euromonitor; Credit Suisse Research; Team Analysis 15
  22. 22. Beiersdorf – An Alternative (2/2) Combined Skin Care Market Share Beiersdorf Emerging Market Exposure 50% 6% 40% 37% 34% 34% 30% 41% 25% 22% 20% 16% 53% 10% 0% Germany France Italy Great Spain U.S. Britain Unilever LOreal P&G Beiersdorf N. America W. Europe Emerging Markets Combined Deodorant Market Share • In W. Europe, P&G and Beiersdorf combine will lead 70% all markets except France in skin care segment 58% 60% • Beiersdorf has substantial emerging market exposure 50% of 40% much higher than its rival (L’Oreal 33%) 40% • Combination would result in strengthened position in 30% 32% 32% 30% 28% deodorant market 19% • Beiersdorf will provide P&G an entry into Luxury and 20% drug/pharmacy with La Prairie (high end brand) and 10% Eucerin (medical skin care brand) 0% • Combined entity will be able to generate higher Germany France Italy Great Spain U.S. synergies in emerging markets with competitive Britain Unilever LOreal P&G Beiersdorf position in skin care in Vietnam, Malaysia & ChinaSource: Euromonitor; Credit Suisse Research; Team Analysis 16
  23. 23. Table of Contents Overview of HPC Market P&G - white space analysis and investment opportunities Reckitt Benckiser – an investment opportunity Key Risks & Growth Drivers Alternative investment opportunities Valuation Appendix
  24. 24. On Standalone basis, per share price of Reckitt Benckiser is worth $54.6 whileusing average of price obtained through several valuation methods Triangulation of Share Price Sensitivity Analysis of DCF Valuation $120 Perpetuity Growth Rate Transaction WACC 1.00% 1.50% 2.00% 2.50% 3.00% $100 7.50% $66.97 $70.45 $74.56 $79.50 $85.53 DCF 8.00% $62.03 $64.90 $68.24 $72.20 $76.95 $80 Peer 8.50% $57.75 $60.14 $62.91 $66.13 $69.93 9.00% $54.02 $56.03 $58.33 $60.99 $64.09 $60 9.50% $50.73 $52.44 $54.38 $56.59 $59.15 10.00% $47.81 $49.27 $50.92 $52.79 $54.92 $40 10.50% $45.20 $46.46 $47.87 $49.46 $51.26 EV/EBITDA Market Valuation Methodology Share Price $20 Price: $50 DCF $58.33 EV/EBITDA Multiple $45.03 $0 P/E Multiple $54.14 Transaction Comparable $60.81 Average $54.58 Key assumptions for DCF valuation of Reckitt Benckiser • Sales in pharma segment are expected to be hit in 2011 due to expiry of exclusivity for Suboxone in US from Oct 2009 and launch of generic version in 4Q10 • Pharma sales are expected to recover from 2012 as Reckitt takes distribution of suboxone in Europe from Schering Plough Inc. helping the company to post high margins in pharma division • Fabric Care segment is expected to languish owing to new launches by P&G in Western Europe • Revenue Growth to be mainly driven by developing markets while revenues from Europe are only expected to see organic growth from 2012 onwards • Organic revenue growth expected to stabilize at 5% from 2014 while perpetuity growth rate is assumed as 2% • Cash flows are discounted at a WACC of 9% with cost of equity at 9.8% and beta of stock at 1.1 • EBITDA margins are expected to stabilize at 25.1% in the long run and the company is expected to maintain a payout ratio of 50% in the futureNote: GBP|USD exchange rate has been taken as 1.5523 which is spot rate as of 30th Aug 2010 17
  25. 25. P&G will be able to realize synergies of more than $5 billion by acquiring ReckittBenckiser should pay per share price between $52 and $66 for this transaction Triangulation of Share Price Date Acquirer Target Deal Size Premium ($ million) $120.00 2010 Schlumberger Ltd. Smith International, Inc. 11,065.13 38% Transaction 2010 Novartis AG Alcon, Inc. 28,093.73 22% 2009 Exxon Mobil Corp. XTO Energy, Inc. 30,208.35 25% $100.00 DCF Burlington Northern Santa Fe 2009 Berkshire Hathaway, Inc. 26,783.62 31% Corp. $80.00 Peer 2009 Kraft Foods, Inc. Cadbury Ltd. 19,145.29 48% $67 2009 Gas Natural SDG SA Union Fenosa SA 11,164.21 15% $60.00 2009 Suncor Energy, Inc. Petro-Canada 15,744.95 28% $52 2009 Merck & Co., Inc. Schering-Plough Corp. 38,406.36 34% $40.00 2009 Pfizer, Inc. Wyeth 67,003.85 32% EV/EBITDA 2008 Wells Fargo & Co. Wachovia Corp. 15,127.19 Market 80% $20.00 Price: $50 2008 Bank of America Corp. Merrill Lynch & Co., Inc. 46,391.47 70% 2008 Altria Group, Inc. UST, Inc. 10,313.39 20% $0.00 2008 Gas Natural SDG SA Union Fenosa SA 11,807.68 15% 2008 Teck Cominco Ltd. Fording Canadian Coal Trust 10,668.83 18% 2008 Roche Holding AG Genentech, Inc. 44,291.31 9% • Organic revenue growth is expected to accelerate by 2008 The Dow Chemical Co. Rohm & Haas Co. 15,230.88 74% 50bps from 2014 owing to increasing penetration of 2008 InBev SA Anheuser-Busch Cos., Inc. 50,613.03 35% Reckitt’s brands in developing markets 2008 Westpac Banking Corp. St. George Bank Ltd. 18,131.75 29% • Cost saving synergies to accrue fully from 2013 with 2008 Hewlett-Packard Co. Electronic Data Systems 12,631.35 33% Corp. EBITDA margins expected to expand by 50 bps 2008 Mars, Inc. William Wrigley Jr. Co. 21,816.59 28% • P&G will be able to realize synergies of $6.00 billion in 2008 Novartis AG Alcon, Inc. 10,538.47 12% form of accelerated revenue growth and cost savings from Aluminum Corp. of China 2008 Rio Tinto Plc 14,135.25 21% this acquisition Ltd. 2008 CME Group, Inc. NYMEX Holdings, Inc. 11,071.73 • Offer price should not exceed $67 per share as the effect 11% 2008 Sunrise Acquisitions Ltd. Scottish & Newcastle Plc 15,046.36 51% of synergies will go off beyond this price Average 32% • At $67 per share, shareholders of Reckitt will receive a premium of 31% over the closing price on 30th Aug 2010, a day before the announcement of mergerNote: GBP|USD exchange rate has been taken as 1.5523 which is spot rate as of 30th Aug 2010 18
  26. 26. Standalone Valuation of Reckitt Benckiser 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019EEBIT 2,021.25 2,081.63 2,192.51 2,307.50 2,422.87 2,544.02 2,671.22 2,804.78 2,945.02 3,092.27Effective tax rate 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%NOPLAT 1,515.94 1,561.23 1,644.38 1,730.62 1,817.15 1,908.01 2,003.41 2,103.58 2,208.76 2,319.20Depreciation & Amortization 122.75 125.4 133.96 143.92 151.11 158.67 166.6 174.93 183.68 192.86Change in working capital -6.09 18.7 60.4 70.24 50.76 53.3 55.97 58.76 61.7 64.79Capex -188.21 -192.28 -205.41 -220.68 -231.71 -243.29 -255.46 -268.23 -281.64 -295.73Free Cash flow 1,444.38 1,513.05 1,633.34 1,724.11 1,787.32 1,876.69 1,970.52 2,069.05 2,172.50 2,281.13% Growth 4.80% 7.90% 5.60% 3.70% 5.00% 5.00% 5.00% 5.00% 5.00%As % of sales 17.70% 18.10% 18.30% 18.00% 17.70% 17.70% 17.70% 17.70% 17.70% 17.70%PV of Free Cash flow 1,403.48 1,348.81 1,335.82 1,293.63 1,230.33 1,185.18 1,141.69 1,099.79 1,059.43 1,020.55Perpetuity Growth Rate 2%WACC 9.00%Terminal Value 33,239.28 Firm Value FV/PV of Terminal Value 14,870.91 Date Target Acquirer (US$mm) revenue FV/EBITDAFirm Value 26,989.62 10-May Smashbox Estee Lauder 2,501 2.6x 16.0xNet Debt -215 10-Jan Bare Escentuals Shiseido 1,700 3.1x 10.3xPension Liability 371 9-Nov Cadbury Kraft 13,234 2.1x 13.0xEquity Value 26,833.62 9-Sep Sara Lee HPC Unilever 1,874 1.7x 10.0xPer share value £ 37.63 8-Jun Clarins Financiere FC 3,883 2.4x 16.7x 8-Apr Wrigley Mars 23,372 4.3x 19.6x 8-Mar Frederic Fekkai P&G 420 4.7x 23.3x EV/Sales EV/EBITDA P/E 8-Jan YSL Beaute LOreal 1,666 1.8x 22.3x 2010E 2011E 2010E 2011E 2010E 2011E 7-Oct Burts Bees Clorox 925 5.4x 18.1xUnilever N.V. 1.6x 1.5x 9.8x 8.9x 14.9x 13.5x 7-Jul Playtex Energizer 1,880 2.5x 13.6xProcter & Gamble 2.6x 2.5x 10.3x 9.7x 14.7x 14.4x 7-Jul Numico Danone 12,225 4.3x 21.7x 7-Jul Danone Kraft 5,475 2.7x 13.6xColgate Palmolive 2.6x 2.5x 9.7x 9.1x 15.4x 14.2x 7-Apr Gerber Nestlé 4,093 3.0x 16.4xHenkel AG 1.3x 1.3x 8.9x 8.1x 14.2x 12.7x 6-Dec Novartis Nestlé 1,894 2.7x 19.5xClorox Co. 2.1x 2.0x 9.0x 8.5x 14.6x 13.4x 6-Mar Body Shop LOréal 1,141 1.5x 11.9xChurch & Dwight Co. 1.8x 1.7x 8.5x 7.9x 15.3x 13.8x 5-Jan Gillette P&G 57,602 5.8x 19.2xOriflame 1.8x 1.6x 13.1x 11.3x 18.5x 15.7x 3-Oct Beiersdorf Tchibo Holding 12,129 2.2x 16.3xLoreal 2.5x 2.4x 12.3x 11.1x 20.4x 18.0x 3-Mar Wella P&G 6,590 1.9x 15.3xBeiersdorf 1.4x 1.3x 10.2x 9.7x 21.3x 19.7x 1-May Clairol P&G 4,950 3.1x 14.9xMean 2.0x 1.9x 10.2x 9.4x 16.6x 15.0x Average 3.0x 16.4xAverage Share Price 22.35 21.67 29.87 28.23 35.85 34.01 Median 2.7x 16.3x 19
  27. 27. P&G should acquire Reckitt Benckiser in all stock deal by issuing depositoryreceipts to shareholders • P&G will offer between 0.9193 and 1.1285 shares of P&G for every share of Reckitt Benckiser  Price has been set using $59.37, the closing price of P&G common stock on 30 th Aug 2010 and an exchange rate of $1.5523 to £1.00 (as of 30th Aug 2010) • P&G would need to issue a maximum of 804.3 million shares of P&G in form of Depository Receipts to shareholders of Reckitt Benckiser in this deal No. of Share outstanding Shares to be issued by Offer Price Share Price of P&G Swap Ratio for Reckitt (in million) P&G (in million) $67 $59.37 1.1285 713 804.63  Depository receipts will be treated as common stock of P&G and will lead to 3.644 billion common shares outstanding of the combined company  Shares issued to shareholders of Reckitt Benckiser will represent approximately 22 percent of the outstanding P&G stock after the merger  P&G will pursue an extensive stock repurchase program over the next 3 years to soften the impact of stock dilution  P&G followed a similar stock repurchase program after the purchase of Gillette • JAB Holdings B.V., majority shareholder in Reckitt Benckiser will prefer stock deal vis-à-vis cash  JAB Holdings promoted by Benckiser Family owns more than 15 percent in the current company and would prefer stock deal as a cash deal would put huge tax liability on them • P&G should retain the top management of Reckitt Benckiser after the deal  Top management of Reckitt Benckiser is considered one of the best in industry and it has consistently delivered top performance over the years 20
  28. 28. Table of Contents Overview of HPC Market P&G - white space analysis and investment opportunities Reckitt Benckiser – an investment opportunity Key Risks & Growth Drivers Alternative investment opportunities Valuation Appendix
  29. 29. Appendix A: Majority of P&G revenues are contributed by developed markets withdeveloping markets contributing only 34% P&G Segmental Revenue Category wise Geography Split $79.3B $76.7B $78.9B 100% 100% 20% 20% 25% 35% 30% 33% 80% 45% 80% 60% 60% 40% 40% 80% 80% 75% 65% 70% 67% 55% 20% 20% 0% 0% 2008 2009 2010 Beauty Grooming Health Snacks & Fabric & Baby P&G Fabric Care and Home Care Beauty Care Pet Care Home Care & Baby & Family Care Health Care Care Family Care Grooming Snacks & Coffee Developed Emerging P&G Geographical Revenue Mix P&G Emerging Markets Revenue Share 80,000 3,154 2,611 7,104 6,902 9,970 10,262 60,000 35% 34% 33% USD Million 11,504 11,841 32% 40,000 16,577 30% 29% 16,106 26% 20,000 25% 23% 29,600 30,000 21% 20% 20% 0 20% FY2009 FY2010 United States Western Europe Asia 15% CEEMEA Latin America Canada 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: P&G Company Data; Jefferies Research; Morgan Stanley Research; Credit Suisse Research 21
  30. 30. Appendix B: Reckitt Benckiser’s Power Brands Reckitt Benckiser has a highly focused portfolio with 17 Power brands that represent 70% of net revenues: Fabric Care: Fabric Treatment worldwide #1 – led by Vanish Water Softeners worldwide #1 – led by Calgon Garment Care worldwide #2 – led by Woolite Surface Care: worldwide #1 – driven by: Multipurpose Cleaners - Dettol and Bang worldwide #1 – led by Lysol Lavatory Care worldwide #1 – led by Harpic & Lysol Dishwashing: Automatic Dishwashing worldwide #1 – led by Finish Home Care: Air Care worldwide #2 – led by Airwick Pest Control worldwide # 2 – led by Mortein Personal Care: Antiseptic Personal Care worldwide #1 – led by Dettol Depilatories worldwide #1 – led by Veet Acne Treatment worldwide #2 – led by Clearasil Health Care: Medicated Sore Throat Relief worldwide #1 – led by Strepsils Cough Relief worldwide #2 – led by Mucinex Leading positions in Analgesics and Upper Gastro Intestinal Relief in Europe and Australia led by Nurofen and Gaviscon Food: Mustard worldwide #1 – led by French’sSource: Team Analysis 22

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