Kellogg, Reckitt Benckiser join queue for a glass of Horlicks

MUMBAI | NEW DELHI: Breakfast cereal maker Kellogg and UK healthcare giant Reckitt Benckiser Plc are the latest entrants in the race to acquire the consumer nutrition business of GlaxoSmithKline, joining Nestle, Unilever, Mondelez and Coca-Cola in the near $4.5-billion takeover pursuit, said several people with knowledge of the matter.
While Kellogg’s entry is regarded as a surprise, being ultra-conservative in India even after a presence of more than two decades, Reckitt Benckiser has been growing inorganically across the world under CEO Rakesh Kapoor. Its last big acquisition in India was Paras Pharmaceuticals eight years ago. Last year, Kapoor steered the $18-billion acquisition of US infant formula business Mead Johnson, its largest purchase.

Both companies have completed initial evaluations. Kellogg is being advised by Rothschild, and Reckitt, maker of Dettol soap and Air Wick air freshener, has roped in Goldman Sachs, said the people cited above.

Reckitt and Kellogg declined to comment. For British healthcare giant Reckitt Benckiser, seen as a strong contender for GSK Consumer, inorganic growth has been a strategy that has mostly worked well. The Mead Johnson baby milk business helped it halt a string of disappointing results. Last month it posted higher-than-expected earnings that saw sales grow 4% on the back of its health and hygiene business. UBS analyst Pinar Ergun feels the July quarter marked the end of a long downgrade cycle.

“The Mead Johnson acquisition has taken RB into a global market leadership in consumer health and foods,” Reckitt has said. “Mead Johnson’s geographic footprint significantly strengthens our position in developing markets, which account for approximately 40% of the combined group’s sales.”



If the Horlicks deal does materialise, Reckitt Benckiser is likely to push it into chemist channels and pharmacies instead of traditional grocery, and reformulate the brand beyond just a milk-based beverage, said an executive aware of the development. Also, there are product synergies between Reckitt Benckiser and GSK’s over-the-counter (OTC) products such as Crocin, Sensodyne and Eno.

BREAKFAST OF CHAMPIONS

With its India sales at Rs 800 crore after 24 years in the country, Kellogg’s $14-billion parent has been pushing inorganic growth, especially in emerging markets to take its portfolio beyond breakfast to overall snacks. The potential acquisition of Horlicks will be a global move driven by its Michigan-based parent, people aware of the development said.

“Kellogg India doesn’t have the resources to push such a mega deal,” said a top industry executive, closely associated with the company.

“Besides, historically, it hasn’t been aggressive in India, and neither has it explored acquisitions, instead, basing its strategy only on localisation, pushing small packs and moving beyond breakfast to cereal-based snacking, which is witnessing intensified competition.”

Kellogg India contributes 10% to Asia-Pacific revenue and leads the Indian breakfast space with an estimated share of over 60%, but deep-pocketed rivals are looking to challenging that. Last month, Nestle announced its foray into the Rs 980-crore breakfast cereal category with Nesplus. Others such as PepsiCo, ITC Foods, Britannia and MTR have been pushing ready-to-cook products in the space. Kellogg India’s new managing director Mohit Anand, formerly of Unilever, has the mandate to push growth aggressively.

The maker of cornflakes, Honey Loops, Special K, Chocos, oats and muesli, has been pushing localisation and on-the-go consumption, penetrating small towns and markets with smaller packs of cereal at fast-moving price points of Rs 10 and Rs 5. It’s also been looking to broadbase distribution outreach to channels besides grocery stores. The Horlicks deal, if it goes through, will be its first acquisition in India.

With consumer trends moving away from breakfast cereal in mature markets that are perceived to be sugary and having artificial ingredients, the cereal maker has been diversifying into healthier foods inorganically.

Globally, Kellogg has been shopping for strategic brands and businesses. Its inorganic M&As include a stake acquisition in packaged food maker Tolaram Africa Foods (TAF) in May this year.

TAF is one of the largest manufacturers and distributors of noodle products in Ghana and Nigeria. In 2016, it acquired Brazilian Parati Group which makes biscuits, and powdered beverage and pasta brands. It acquired Egyptian biscuit company Bisco Misr in 2015. Before that, it bought Pringles salty snacks in 2012. None of the brands has been brought to India.

While the health food drinks category has been growing only in single digits, GSK Consumer’s Horlicks and Boost are strong brands that can be leveraged into other categories in the health space. Kellogg could use it to enter biscuits, nutribars and crackers, for instance.

“A buy into Horlicks will not only give it instant shelf space in the healthbeverage category, but also help it expand into other categories such as biscuits, a space where it has had an initial failed attempt,” said a senior executive formerly associated with Kellogg. It made a shortlived foray into biscuits in India in the 1990s.

The Horlicks and Boost brands command approximately 70% of overall value share in Indian malted food drinks (MFD) market.

They had a combined revenue of £550 million in 2017, with India contributing most of it. In March, the company decided to review and potentially sell the nutrition products business to fund the $13 billion buyout of Novartis’ stake in a consumer healthcare joint venture.

The review will also include an assessment of the parent’s 72.5% stake in GSK Consumer in India. The current market cap of the company is Rs 28,522.91crore.

The outcome of the review is likely by end-2018. Morgan Stanley and Greenhill are advising GSK.