TOMCO HLL Merger

Submitted by
Akhilesh Dalal (907)
FMCG sector
The Indian FMCG sector with a market size of
US$13.1 billion is the fourth largest sector in the
economy.
A well-established distribution network, intense
competition between the organized and
unorganized segments characterize the sector.
To grow by 60%
Increased focus on farm sector will boost rural
incomes, hence providing better growth
prospects to the FMCG companies.
Tata oil mills company ( TOMCO)
TOMCO was incorporated as a public limited company on
December 10, 1917.
It was engaged in the manufacture and marketing of
Soaps
Detergents
Glycerin's
Vanaspati
edible oils
toilet preparations
cattle and poultry feeds
oil cakes
deoiled meals
fish and fish products.
TOMCO affiliates/associate companies:
Industrial Perfumes Ltd.
Tata Vashisti Detergents Ltd.
Tata Ceramics Kerala Ltd.
"Kalyani Soap Industries Ltd.
Tata Oil Company Ltd.
Background TOMCO
Listed at Bombay, Cochin, and Madras.
In 1991 -92, TOMCO's turnover was Rs 425 crore
It employed about 5,700 people
Sold 1,66,000 tonnes of soaps and detergents
During 1991-92, Tata Sons (a holding company for other Tata
companies) decided to review their business strategy.
Was decided to concentrate on few core areas of competence.
TOMCO was seen as a company that did not suit the new strategy
of Tatas.
TOMCO was seen as poor in marketing and distribution.
The raw material cost and wage bill were also excessive.
The company continued to make losses and in 1992-93
The dividend was skipped.
Balance sheet of TOMCO
Balance Shee of TOMCO
(as on 31 March)
1993 1992 1991
Assets
Fixed assets
Investments
Current assets
Loans and advances
Miscellaneous Expenditure
Total
Liabilities
Share Capital
Reserves and surplus
Secured loans
Unsecured loans
Current Liabilities
Total
31.38
23.39
105.56
84.96
1.40
246.69
22.65
43.88
85.14
18.34
76.68
246.69
32.57
13.43
178.33
72.14
1.46
297.93
22.65
43.35
103.22
29.92
98.79
297.93
34.70
16.01
125.01
40.54
0.62
216.88
10.88
26.16
116.11
1.24
62.50
216.88
0
50
100
150
200
250
300
350
1993
1992
1991
Profit and loss TOMCO
Profit and loss statement of TOMCO
(Rupees in
crore)
1992-
93
1991-92 1990-
91
Gross Sales revenue
Other income
Profit before dep. And int.
Less : Interest
Less : depreciation
Profit before tax
Less : provision for tax
Profit after tax
312.24
59.5
27.18
22.63
3.59
0.96
0.31
0.65
428.4
17.73
23.20
18.44
3.64
1.12
-
1.12
382.8
5.71
23.92
14.20
3.18
6.54
0.90
5.64
0
50
100
150
200
250
300
350
400
450
Gross Sales
revenue
Other income Profit before
dep. And int.
Profit after tax
1992-93
1991-92
1990-91
Equity share data TOMCO
31.3.9
3
31.3.92 31.3.91
Face value Rs
Book value Rs
Dividend (%)
EPS Rs
10
29.75
-
0.30
10
29.45
12.5
0.50
10
36.17
20
5.19
Distribution of TOMCO shares
22% Tata Group
41% Indian financial institutes owned by government
37% General public
The market price as on June 17,1993 was Rs
52.50 per share.
Hindustan lever Limited
HLL was incorporated as a private limited company on October 17, 1933
and was converted into a public Limited company on October 27, 1956.
It is a subsidiary of the Anglo-Dutch international giant Unilever.
HLL is engaged in the manufacturing and marketing of
soaps, detergents, toilet preparation, basic chemicals, fertilizers, and other
agricultural inputs.
HLL is also a recognized export trading house.
HLLs presence in the Indian soaps and detergents market is truly
dominant: some of its brands such as Lifeboy, sunlight, Lux Rin and
surf are household names in India.
These brands are also unilevers international bands.
It was generally opined that HLLs brands did leave gaps in the product
line.
In fact, Nirma exploited this weakness of HLL fully in the 80s.
Affiliates/associate companies of HLL
Brooke Bond India Limited
Lipton India Ltd
Pond's India Ltd
Background HLL
The HLL equity shares are listed on stock exchanges at
Ahmedabad, Bombay, Calcutta, Cochin, Delhi and
Madras.
Between 1984 and 1992, HLL's gross turnover grew at
16 per cent
The profit before tax grew at 18 per cent per annum
The profit after tax showed an annual growth rate of
about 21 per cent per annum
During 1956-1992, a period of 37 year, HLL earned
profits and declared dividend in every year.
SWOT analysis of HLL
Strengths
HLL enjoys a formidable distribution network
covering over 3400 distributors and 16 million
outlets.
This helps them maintain heavy volumes, and
hence, fill the shelves of most outlets.
Weakness
HLL's market dominance, originating from its
extensive reach and strong brand
presence, allowed it to raise the prices even as
raw materials were getting cheaper.
Hence, though the volumes decreased, the
margins grew, and company was able to earn
more profits.
But higher margins attracted competition in
areas of operations.
HLL's strategy remained focused on creating
power brands and earning higher margins.
Opportunities
India is one of the world's largest producer of FMCG goods but its
exports are miniscule as compared to production.
Though Indian Cos. have been going global, their focus is more
towards Asian countries because of the similar preferences.
HLL is one of the top companies exporting FMCG goods from India.
An expansion of horizons towards more and more countries would
help HLL grow its consumer base and henceforth the revenues.
Opportunity in Food Sector - The advent of modern trade has
opened up greater opportunities for HLL to diversify its brand and
strength its food division.
It could look at introducing products from its parents stable like
margarines and could also look at expanding its Knorr range of
products.
Threats
ITC has reduced its dependence on the cigarettes
business - Contribution of the core business in
revenues has come down from 87% in FY99 to 70% in
FY05.
Over a period of five years, ITC has extended its
presence into areas like
foods, retailing, hotels, greetings, agri, paper, etc.
These are businesses that can give it growth impetus in
the long run.
With ITC gaining momentum in each of these
businesses, it is turning into a consumer monolith, and
hence, the greatest threat to HLL's Business.
Balance sheet HLL
HLLs Balance Sheet 1990-
1992
(as at 31 March)
(Rupes in Crore)
1992 1991 1990
Assets
Fixed assets
Investments
Current assets
Loans and advances
Total
Liabilities
Share Capital
Reserves and
surplus
Secured loans
Unsecured loans
Current liabilities
222.75
12.24
597.74
96.83
929.56
139.99
193.31
93.32
106.96
395.98
193.53
7.60
533.49
76.06
810.68
139.99
151.11
77.31
87.44
354.83
179.19
8.52
441.34
75.47
75.47
93.22
162.06
80.00
79.07
260.07
0
100
200
300
400
500
600
700
Fixed
assets
Current
assets
Liabilities Share
Capital
Reserves
and
surplus
Current
liabilities
1992
1991
1990
Profit and loss HLL
Profit and loss account of Hindustan Lever
(Rupees In Crore)
1992 1991 1990
Gross Sales revenue
Other income
PBDIT
Less :interest
Less : depreciation
Profit before tax
Less: Tax Provision
Profit after tax
2,86.87
12.00
217.77
32.19
19.60
165.98
67.50
98.48
1,776.32
6.16
177.52
20.63
19.19
137.70
57.50
80.20
1,460,27
5.99
146.30
18.31
17.25
110.74
52.00
58.74
0
50
100
150
200
250
Other income PBDIT Profit before
tax
Profit after
tax
1992
1991
1990
Equity share data for HLL
Equity Share Data for HLL
(Rs)
1992 1991 1990
Face Value
Book Value Per Share
Dividend (%)
EPS
10
23.8
42.%
7.03
10
20.75
38.50%
5.73
10
27.36
42%
6.29
The share capital of HLL as on December 31, 1992 was Rs
140 crore
The market price as on June 17, 1993 was Rs.375 per
Share.
For 1991 and 1992 enlarged capital base to bonus issue of
1:2
Foreign shareholding 51.16%
FIs 16.79%
Public 32.05%
Sales mix HLL and TOMCO
1991 92
(Rupees in crore)
HLL TOMCO
Soaps, detergents, and related items
Chemicals and agro
Personal products
Total
1,219
236
302
1,757
270
85
67
322
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Soaps, detergents, and related items Chemicals and agro Personal products Total
HLL
TOMCO
The merger
90% of the shareholding power agreed to
merger -sec 394-391 of companies act
2 shares of HLL to 15 shares of TOMCO face
value Rs.10 - valuation techniques.
Experts examined the valuation on 3 criterias
Comparison of book value of asset per share
Market price on date
Present value of the future cash flows of the two
companies if merger did not take place.
Accounting of merger
In the account for the year ended December 31, 1994 the following notes
appear with regard to the merger of Tomco:
Pursuant to the scheme of amalgamation of the Tata Oil Mills Company
Ltd. (Tomco ) with the company sanctioned by the Hon'ble Bombay High
Court
During the year, the assets and liabilities of Tomco were transferred to and
vested in the company with retrospective effect from 1st April 1993
The amalgamation has been accounted for under the ' pooling of interests
' method and, accordingly, the difference, aggregating Rs 6,74.76 lakh
being the net assets taken over less the paid-up value of the shares of the
company issued and other reserves assumed, has been added to the
company's General Reserve.
The Share Swap Ratio Tomco Share Capital: Paid-up equity capital
2,15,04,849 @ Rs 10 each Ratio: for every 15 Tomco = 2,15,04,848 2 / 15
Shares two HLL shares = 28,67,314 shares in HLL
HLL Tomco
1. Date of
incorporation
17.10.1933 10.12.1917
2. Business Soaps detergents, toilet
preparations, basic
chemicals, fertilizers, agri.inputs, exp
ort house
Soaps detergents, toilet
preparations, glycerine, vanaspathi, edi
ble oils, soaps, cattle and
polutry, feeds, oil cakes, deoiled
meals, fish and fish products
3.
Manufacturing
Units in
Maharashtra, West , J, Madhya
Pradesh, Uttar Pradesh , Karnataka,
Punjab, Andhra, Tamil Nadu, New
Delhi, Pondicherry
Maharashtra, West Bengal, Kerala,
Uttar Pradesh, Bihar, Gujarat, Tamil
Nadu.
4. Capital as at 31.12.92
Equity Rs 139.99 crore Rs 21.51 cr.
Preference -- Rs 1.15 cr.
5. Shareholding pattern
Foreign holding 51.16 % -----
F.Is 16.79 % 40.84 %
Corporate bodies --- 22.87 %
Public 32.05 % 36.29 %
6. Equity share data 31-12-92 31-03-93
Face value in Rs 10 10
Book value per share 23.80 29.75
Dividend 42 % ----
E.P.S. 7.03 0.30
Market price as on 17-06-93 Rs 375/- Rs 52.50/-
Synergies of the merger
Access to the Indian markets
Enhanced HLL market share
Using the brand they launched various variants in
different products.
With Lyril freshness concept was leveraged with
Lyril liquid gel
Life boy brand was leveraged using stretching it
to different segments.
Similarly for Le-cancy, Rexona etc.
Rural market was exploited with 75gm soap bars.
Perception of laborer
Hll labor felt that their bargaining power will
weaken
TOMCO labors felt that they will be axed as a
direct consequences of the synergy
HLL was known to be tough employer
Job insecurity in TOMCO as they thought that
they will thrown out after the merger
Perception of the consumer
Will create a monopoly in market
Consumer interest will be lost
Terms of the merger
Swap ratio
Up gradation of TOMCO to technological front
that included investment of 50 cr from
TOMCO
Tenancy rights in some of the TOMCO assets.
Uni levers 51% shareholding
Competition for HLL
In June 1993, Nirma's Karsanbhai Patel made an attempt to
put a spoke in the wheel. He was planning to put in a counter
bid of Rs 75 per share, a price more attractive than the
valuation of Rs 52 implied in the exchange ratio of 2:15.
Highly placed sources at TOMCO confirmed in June 1994 that
Godrej Soap had also made a bid to take-over TOMCO
although no concrete terms had bee discussed
But a TOMCO executive stated that these moves were too late
and were to make delay in the proceedings
Law suits
Shareholders of TOMCO
Labors of TOMCO
Consumers of TOMCO
Workers of HLL
Between law suits: Phase 1
Production shifted from the Sewree plant to the new cost efficient Tata
Vashisti plant at Chiplun
Reducing the company and stockiest inventory from three months to 15
days.
To push pipe line stocks, HLL asked TOMCO to cut down produc-tion by
about 30 per cent form March, 1993 to June, 1993.
The TOMCO oils and fats purchases were connected to the Lever's
pur-chase pool.
Raw material costs are said to here reduced by about 40 per cent. TOMCO
is said to have gained about Rs 1,500 per tonne on the purchase of oils
and fats through HLL sources.
Phase 2
HLL asked TOMCO to concentrate on creating brand pull for select
products.
The TOMCO management began looking for niches, like hair oils and
per-fumes, to generate profits.
Phase 3
Every product was being evaluated from a production point of view and
parameters were developed based on the unit cost of production and the
quality of the product.
TOMCOs product quality has to be on par with HLLs own quality norms
and product costs, as Close to those of HLLS as possible.
TOMCOs production personnel have been reshuffled. About six
manufacturing people form TOMCO are now said to be managing the
show under the guidance from one lever man to each factory.
After the merger
Low scale for TOMCO labors
Gave a VRS scheme to Axe TOMCO workers
HLL gave very short notices to TOMCO
workers to analyze their options
No schemes for retraining of retrenched staff
Post merger
Lead to market share above 60%
HLL became a monopoly in Indian FMCG
sector
Reach to Indian markets.
Thank you