Hindustan Lever may bag Modern Foods - Views on News from Equitymaster

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Hindustan Lever may bag Modern Foods

Jan 10, 2000

According to newspaper reports, Hindustan Lever Limited (HLL) is all set to bag Modern Foods, a bread and cakes manufacturer, as a result of its being the sole bidder for the government's 74% stake. HLL is the largest consumer products company in India. HLL's business portfolio comprises soaps, detergents, personal products, food products and frozen desserts. Modern Foods Limited has a network of 14 bread manufacturing units and a comprehensive distribution network comprising 22 operating franchisee units.

This acquisition, if is comes through, will benefit HLL in a number of ways. First, the company's burgeoning cash reserves will get absorbed and help improve overall return on equity. Second, the company's topline growth has failed to pick up even as the economy gains pace. This acquisition will enable HLL to generate topline growth even as its bottomline growth will continue to benefit from cost cutting exercises. Finally, the acquisition would be in line with the company's strategy to focus on the food segment in the coming years, as it sees a big potential in this market.

The other benefits of this deal include a nationwide distribution that Modern owns. Integrating this with the excellent distribution network of HLL would bring about increased distribution reach at lower costs. Moreover, the company would get to own the 'Modern' brand, which has a national appeal.

The biggest drawback of this acquisition would be to have the government as a co promoter. This would delay the implementation of cost cutting exercises via measures including employee rationalisation. The other concerns pertain to whether the food sector will witness the kind of growth that is being envisaged by HLL.

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