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GlaxoSmithKline's Horlicks Up for Grabs: Who Will Snap It Up?

Zacks Equity Research
Updated
Some investors are rotating out of earlier high flying technology stocks into cheap emerging markets.

Leading pharmaceutical and healthcare company GlaxoSmithKline plc GSK has started a strategic review of Horlicks — a famous malted milk hot drink in India — along with other smaller nutrition products like Boost. The company is also planning to offload its 72.5% stake in India-listed GlaxoSmithKline Consumer Healthcare. Although it is still unclear which company GlaxoSmithKline would prefer selling Horlicks to, market speculations point at Nestle, Kraft Heinz KHC and Unilever.

Other potential bidders include Mondelez International MDLZ, Indian company ITC Ltd., PepsiCo PEP, Associated British Foods, Coca-Cola KO and JAB holdings.

Why is Horlicks Up for Sale?

Glaxo recently inked a deal with Novartis NVS to take over the latter’s 36.5% stake in its Consumer Healthcare joint venture for $13 billion (£9.2 billion). In order to fund the deal, Glaxo is looking to vend Horlicks and other nutrition products. Moreover, Glaxo wants to shift focus toward over-the-counter and oral health categories.

But why sell GlaxoSmithKline Consumer Healthcare? The Indian arm of the pharmaceutical giant has been grappling with sluggish sales for quite some time now. Revenues decreased 3.1% in 2017 and 0.5% in the first nine months of 2017. This clearly indicates that Horlicks, which accounts for about 90% GlaxoSmithKline Consumer Healthcare sales, has also not been performing well.

Moreover, malt-based drinks are losing sheen in India of late. Major players in the health food drinks category have been facing the brunt of increased popularity of breakfast cereals and intense competition. Nevertheless, focusing on providing actual nutritional benefits and not just on enhancing taste can change the scenario. According to a study by Research and Markets, India's malted drink market is expected to see a CAGR of 17.4% during 2017–2021.

Who All Will Show Interest?

It goes without saying that adding Horlicks will drive market share for the buyer as it currently dominates the malt-based drink market in India. According to GlaxoSmithKline, its nutrition products portfolio, including Horlicks, had raked in total sales of $550 million in 2017.

According to market sources, the stake is worth $3.1 billion as per current market prices but Glaxo wanted a premium in any sale. They also estimate valuation of the consumer health nutrition business at around $4 billion.

Apart from the companies mentioned earlier, other potential bidders include Mondelez International, India’s ITC Ltd., PepsiCo, Associated British Foods, Coca-Cola and JAB holdings.

Nestle had previously expressed interest in Horlicks. The company already has a minor presence in the health nutrition space in India with Milo.  

Beverage giants PepsiCo and Coca-Cola could also consider buying Horlicks as recently they have been keen on diversifying product offerings given the slump in carbonated beverage drink sales.

Mondelez, which operates thorough Cadbury Ltd., has a commanding presence in India. The company generates about 40% revenues from emerging markets, which include India and is keen on expanding in developing countries to gain scale in its categories or distribution capabilities.

Meanwhile, Kraft Heinz acquired malt-based health food drink brand Complan from Glaxo in 1994. The company is currently facing a decline in sales primarily due to soft consumer demand in the United States and Canada. Thus, expanding business in emerging markets can prove beneficial.

European investment firm, JAB Holdings, backed by Austria’s billionaire Reimann family is also a key contender. The company has been actively taking over companies in the consumer and food sectors over the past few years.

Associated British Foods might also show interest in order to expand in India although the size of Glaxo’s business could be a drag, according to a market source.

GlaxoSmithKline expects the outcome of the strategic review to be out by the end of 2018. So for now, it’s a wait-and-see story.

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Novartis AG (NVS) : Free Stock Analysis Report
 
GlaxoSmithKline plc (GSK) : Free Stock Analysis Report
 
Coca-Cola Company (The) (KO) : Free Stock Analysis Report
 
Pepsico, Inc. (PEP) : Free Stock Analysis Report
 
Mondelez International, Inc. (MDLZ) : Free Stock Analysis Report
 
The Kraft Heinz Company (KHC) : Free Stock Analysis Report
 
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