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 1991Assets Fixed assets Investments Current assetsLoans and advancesMiscellaneous Expenditure Total Liabilities Share Capital Reserves and surplus Secured loans Unsecured loansCurrent Liabilities Total

31.3823.39105.5684.961.40246.69

22.6543.8885.1418.3476.68246.69

32.5713.43178.3372.141.46297.93

22.6543.35103.2229.9298.79297.93

34.7016.01125.0140.540.62216.88

10.8826.16116.111.2462.50216.88

Assets

Fixed

asset

s

Investm

ents

Current a

ssets

Loan

s and ad

vances

Miscell

aneo

us Exp

enditu

reTo

tal

Liabiliti

es

Share

Capita

l

Reserve

s and su

rplus

Secu

red lo

ans

Unsecured

loan

s

Current L

iabiliti

es

To

tal0

50

100

150

200

250

300

350

199319921991

Profit and loss TOMCO Profit and loss statement of TOMCO (Rupees in crore)

1992-93

1991-92 1990-91

Gross Sales revenue Other incomeProfit before dep. And int.Less : Interest Less : depreciation Profit before taxLess : provision for taxProfit after tax

312.2459.527.1822.633.590.960.310.65

428.417.7323.2018.443.641.12-1.12

382.85.7123.9214.203.186.540.905.64

Gross Sales revenue

Other income Profit before dep. And int.

Profit after tax 0

50

100

150

200

250

300

350

400

450

1992-931991-921990-91

Equity share data TOMCO

31.3.93

31.3.92 31.3.91

Face value RsBook value RsDividend (%)EPS Rs

1029.75-0.30

1029.4512.50.50

1036.17205.19

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. • HLL’s 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 unilever’s international bands. • It was generally opined that HLL’s 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 HLL’s Balance Sheet 1990-1992 (as at 31 March) (Rupes in Crore) 1992 1991 1990

AssetsFixed assetsInvestmentsCurrent assetsLoans and advancesTotalLiabilities Share Capital Reserves and surplusSecured loansUnsecured loans Current liabilities

222.7512.24597.7496.83

929.56139.99193.3193.32106.96395.98

193.537.60533.4976.06

810.68139.99151.1177.3187.44354.83

179.198.52441.3475.47

75.4793.22162.0680.0079.07260.07

0

100

200

300

400

500

600

700

199219911990

Profit and loss HLL

Profit and loss account of Hindustan Lever (Rupees In Crore)

1992 1991 1990Gross Sales revenueOther incomePBDITLess :interest Less : depreciation Profit before taxLess: Tax ProvisionProfit after tax

2,86.8712.00217.7732.1919.60165.9867.5098.48

1,776.326.16177.5220.6319.19137.7057.5080.20

1,460,275.99146.3018.3117.25110.7452.0058.74

Other income PBDIT Profit before tax

Profit after tax0

50

100

150

200

250

199219911990

Equity share data for HLL Equity Share Data for HLL (Rs)

1992 1991 1990Face ValueBook Value Per Share Dividend (%)EPS

1023.842.%7.03

1020.7538.50%5.73

1027.3642%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 itemsChemicals and agroPersonal products Total

1,2192363021,757

2708567322

Soaps, deter-gents, and re-

lated items

Chemicals and agro

Personal products

Total 0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

HLLTOMCO

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 Tomco1. Date of incorporation

17.10.1933 10.12.1917

2. Business Soaps detergents, toilet preparations, basic chemicals, fertilizers, agri.inputs, export house

Soaps detergents, toilet preparations, glycerine, vanaspathi, edible 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/-

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.

• TOMCO’s product quality has to be on par with HLL’s own quality norms and product costs, as Close to those of HLL’S as possible.

• TOMCO’s 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