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SmithKline Consumer: The waiting bride - Views on News from Equitymaster
 
 
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  • Sep 18, 2000

    SmithKline Consumer: The waiting bride

    The worldwide merger of Glaxo and SmithKline Beecham has sparked off an interesting twist on the Indian horizon. SmithKline is present in India in two segments, one in pharmaceuticals (as SmithKline Pharma) and the other in the malted beverage segment (as SmithKline Consumer Healthcare). While it makes sense for both Glaxo and SmithKline to merge their pharma operations, the business profile of SmithKline Consumer (SBCH) doesn’t quite fit into this jigsaw. So what do they do with SBCH?

    There are several possibilities. For one, they can quite simply merge the company into the group and let it run as an independent entity. But this will take a little bit away from Glaxo’s pharma focus for which it is known. Earlier, Glaxo had sold off its Farex brand (baby food) to Heinz because it did not fit their business profile.

    A second possibility also exists. SBCH operates in Rs 7 bn malted food drink market (estimated at 60,000 tonnes). The market can broadly be classified into white beverages (65%), brown beverages (35%) and soya-based beverages (negligible). SmithKline Consumer commands 65% of this market with its brands Horlicks and Boost. If Glaxo-SmithKline combine decide to sell off this malted beverage giant, the picture could be interesting.

    Among the first one to show interest should be India’s No. 1 FMCG company Hindustan Lever Limited (HLL). The company is facing stagnant growth in turnover and pressure on margins. It is focusing on the food segment for improving its margins. It doesn’t have a presence in the malted and health beverage segment and the buyout of SBCH will give it a ready entry in this segment.

    Another likely suitor seems to be Nestle. Nestle is India’s third largest food product company. It has a dominant presence in the culinary segment. However, Nestle already has presence in the brown beverage segment with ‘Milo’. Incidentally, Milo is the largest chocolate energy drink in the world. But Nestle introduced this brand only in 1997 and Milo has not made a significant impact in the Indian market. So for Nestle also, it makes sense to buyout SBCH (if its up for sale), as SBCH’s Horlicks (white beverage) will complement Milo (brown beverage). It will make it the undisputed king of India’s malted beverage market.

    Till now, the malted drinks were used as milk substitutes and taste modifiers. The market is now skewed towards nutritional and nourishment value. The penetration rate is poor, as it is an expensive product. However, with competitive pressures on children on the rise, an increasing number of households (mostly urban) are buying these products for their children, based on health platform.

    So it is an interesting scenario. SBCH, if put on the block will see a lot of competing suitors apart from Nestle and HLL. But these two companies seem like the frontrunners in that future race, as apart from the will to buy, these companies also have the necessary cash to back it up.

     

     

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