The deal 2010 iim indore bank_onus

P&G’s acquisition of Reckitt Benckiser

The Deal 2010
Campus: IIM Indore
Team Name: BankOnUs

Anshul Bansal | Anshuman Atri | Rahul Jain | Vaibhav Agarwal

Table of Contents

Overview of HPC Market
P&G - white space analysis and investment opportunities
Reckitt Benckiser – an investment opportunity
Key Risks & Growth Drivers
Alternative investment opportunities
Valuation
Appendix

Global HPC market is dominated by few large players with a total market size of
USD 541bn

Global 5 Year 5 Year
Market Share Dynamics Market Size Historical Expected
40% 36% (B$) CAGR CAGR
Cosmetics
Fragrances 39 5.8% 2.4%
30%
Skin care 76 6.7% 2.7%
20% Color Cosmetics 44 5.1% 1.7%
20% Sun Care 8 8.7% 3.0%
Total Cosmetics 166 6.2% 2.4%
10% 7% 6% 6% Toiletries
5%
3% 3% 3% 3% 2% 2% 2% Baby care 6 6.5% 3.1%
1% 1%
0% Bath and shower products 29 4.1% 1.3%
Deodorants 17 6.4% 2.0%
Depilatories 4 5.2% 1.4%
Hair care 64 4.5% 1.6%
Oral hygiene 34 4.4% 1.7%
Men's grooming products 26 6.6% 2.4%
Total Toiletries 179 5.0% 1.8%
Total Cosmetics and Toiletries 260 5.5% 2.0%
Disposable paper products
Industry Sales Mix Hygiene Products 59 6.0% 3.7%
20% 19% Tissue Products 55 5.2% 3.0%
Wipes 9 3.3% 1.9%
16%
13% Away-from home disposable products 19 4.4% 2.6%
12% 11% Total Disposable Paper Products 142 5.3% 3.2%
10% 10%
Household care
8% 7% Air care 8 4.8% 2.0%
6% 6%
5% 5% Chlorine bleach 4 3.7% 0.6%
4% 3% 3%
Dishwashing products 13 5.2% 2.3%
1% 1% 1%
Laundry care 66 5.3% 2.2%
0% Surface care 18 4.0% 2.0%
Toilet care 4 3.7% 1.7%
Trash Bags 16 5.5% 3.5%
Batteries 10 7.5% 3.4%
Total Household Care 139 4.1% 2.0%
Total Household and Personal Care 541 5.0% 2.3%

Source: Credit Suisse Research 1

Developed Markets appear to be structurally impaired owing to SKU
rationalization, decline in new store openings…

SKU Rationalization Wal-Mart Annual Inventory Reduction
• Retailer SKU rationalization and inventory reductions to 100% 9%
8%
boost productivity & margins will impact HPC sector 80% 7%
• Volume growth through “me-too” product launches will be 6%
60%
difficult under current scenario 5%
• Retail has moved to a pull-based model from a push- 40%
51%
70% 83% 100% 4%
3%
based model to improve sales & lower costs 2%
20%
•
32%
Inventory levels at retail stores expected to decline by 15% 1%
100-200 basis points over the next few years, thereby 0% 0%
2009 2010 2011 2012 2013 2014
putting pressure on industry volume
• Leading firms likely to benefit as other products exit % of Walmart Store Base Cumulative Inventory Reduction

Lack of New Store Openings Retail Square Footage Growth
• Store openings started to decline during the 2008-09 5%
recession to preserve liquidity & improve returns
• US retail store square footage increased by 2% in 2008 4%
and 1% in 2009, pressuring industry sales by 0.5% - 1%
• Given the uncertain economic conditions, store
3%

bankruptcies & industry saturation, this trend is expected 2%
to continue in the next few years
• In W. Europe, retail square footage declined from 3% in 1%
early 2000s to about 1% in 2009, with the trend expected
to continue 0%
• Limiting factors include growing elderly & immobile 2004 2005 2006 2007 2008 2009 2010E 2011E
population, rising internet retail & restrictive legislation US Western Europe

Source: Credit Suisse Research; ING Research 2

… increasing Private Label penetration and structural changes in the industry

Private Label/Trade-down Risk Private Label Penetration
• Following recession, value has assumed an important
25%
Europe US
20%
role in purchasing decisions
• Retailers prefer private labels as they provide margins 15%

almost 50% higher than a branded product 10%
• Private label share is much higher in Europe than US 5%
• Due to low confidence, high unemployment, low credit 0%
availability, savings rate for consumers has spiked to
over 6% in 2009 after a dip to almost 0% in 2007
• For branded labels to avoid commoditization, it is
essential to innovate and provide value-added features

Future Implications for HPC industry HPC Industry Volume Growth
• As a consequence of the above factors, the outlook for 4.0% Emerging Structural Issues:
• SKU rationalization (1-2% impact)
HPC growth remains weak in developed markets 3.5%
• Lower store growth (0.5% impact)
• While volumes are expected to recover slightly in 3.0% • Structural shift in consumer
behavior to value
2010, growth beyond this temporary recovery is difficult 2.5%
• Growth of private label offerings at
• HPC sector is expected to grow at 1%-2% at best in the 2.0% retail
next few years, below the 3%-4% levels pre-recession 1.5%
• As a result, emerging market exposure is expected to 1.0%
play a key role in determining the future margins 0.5%
• Companies with higher exposure in the emerging 0.0%
economies expected to do better than others Average (Last Decade) 2010-2011

Source: Credit Suisse Research; ING Research 3

P&G has experienced decline in organic growth over the last two years with its
SG&A expenses remaining constant over last ten years

Organic Sales Growth Percentage Sales from Emerging Markets
9.0% 70% 60%
60% 52%
50% 45%
6.0% 37% 34%
40% 30% 30% 27%
30% 25%
3.0% 20% 15%
10% 4%
0.0% 0%
4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Organic Sales Growth Avg Ogranic Growth
2-yr avg organic sales growth

SG&A as %age of Sales • P&G’s organic sales growth has declined
Declining organic over the last 13 quarters
90
32.1% 32.0%31.8%
33%
sales growth • P&Gs organic sales growth is lower than
80 31.8% 31.7% 31.7% that of its peers
31.3% 32%
70 31.2%
60 31% • P&G’s emerging market exposure is much
30.0% 29.5% less as compared to its peers
Emerging market
USD Bn

50
40
30%
exposure • Although the share has improved over the
30 29% years but growth has slowed down
20
28%
• Despite revenue almost doubling P&G has
10 not been able to reduce SG&A as proportion
0 27% Higher proportion of sales over the last decade
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 of SG&A • P&G’s core SG&A (SG&A excluding R&D,
Revenues (USD Bn) SG&A as % of Sales marketing, ESOPs etc.) is also above its
peers
Source: P&G Company Data; Credit Suisse Research; DB Research 4

There exists limited organic growth opportunity for P&G in developed countries
and thus it needs to grow through inorganic route…

North America Western Europe Latin America Asia Pacific
• Underpenetrated region, with potential to
• Brazil and Mexico represent
• Market leader in most of • Strong overall position expand number of categories P&G
a large opportunity as P&G
the 21 categories in with modest white space competes in from the following current
competes in only 11 and 14
which it competes opportunity levels: Russia (16), China (12), India (8),
categories, respectively.
Philippines (7) and Indonesia (5).

Skin Care
• Skin Care represents the • Recently introduced Skin Care products in
largest growth opportunity in India and Russia and anti-aging products
• Leading market share in
Beauty as P&G has presence • Growth opportunity in Brazil in Japan, Korea, China, Singapore and
Face Cleansers, Creams • Opportunity to expand
in only 50 countries. as P&G currently has no Malaysia
and Lotions (30% share share.
• Long-term whitespace presence. • Introducing Olay Pro-X in China
vs. J&J with 27%).
opportunity in hand and body • Olay Total Effects currently has a 6%
lotions, although likely through share in India
acquisition.

• Leading market share in •Large opportunity with small
• Top three players • Launching Crest Pro-Health in China.
Oral Care manual toothbrushes in presence in Mexico (7%-10%)
(Colgate, P&G, Glaxo • Placing a greater focus on expanding
• Shares leading position in the U.S. (P&G 39%, CL and Brazil (launched Oral-B
Smith Kline) each hold market share in Russia (20% share
North America with Colgate, 33%). toothpaste in March 2009).
approximately 20% of the • Opportunity to enter the Oral Care market
but trails in developing • Market share for • Launch of Oral-B toothpaste
market. in India
markets. toothpaste is very close in Brazil is off to a strong
• Launched Oral-B • #3 position in Australasia, ASEAN and
• 15% market share in with Colgate (both have start (hold approximately a
toothpaste in the Benelux India.
developing markets. approximately 36% 20% market share in the
region in March 2009. • #2 position in Greater China
market share in the U.S.). Pharmacy channel).

Diapers / Wipes
• 35% market share in • #2 position in Australasia, ASEAN and
developing markets India.
• Strong global presence ; large • #1 position - Vertically • #1 position in Greater China (30% volume
• #1 position in the U.S.,
opportunity as usage increases expanding portfolio • #2 position, lagging share).
47% market share in
in developing markets (ex. In (recently launched lower Kimberly-Clark by a wide • Hold leading market share in India after
disposable diapers vs.
1998, the disposable diaper tiered diapers in margin. entering the market two years ago.
Kimberly-Clark with 37%.
market in China totaled 3 mn Germany). • Opportunity to expand penetration in the
cases/yr, vs. 50 mn cases in region as disposable diaper usage
2008 and projected 70 mn becomes more widespread.
cases in 2009)

Source: Credit Suisse Research; Team Research and Analysis 5

… while at the same time it can grow organically in the emerging markets

North America Western Europe Latin America Asia Pacific
• #2 position, with significant
growth potential as market
Feminine Care shares for the top three
• Market share leader in sanitary
• 30% market share in • #1 position, with a large gap leading companies (KMB, J&J • #2 position in Australasia,
napkins in the U.S. with 50%
developing markets. over the closest competitor and P&G) are in the low to mid ASEAN and India.
market share, followed by J&J
• Strong global presence but (J&J). 20% range. • #1 position in Greater China.
and KMB with 18% shares.
large usage opportunity • Growth opportunity through
expansion of value offerings
(recently launched Naturella).

Fabric Care
• 25% market share in
developing markets. • Greater China - #1, Australia,
• #1 position, leading by a wide
• Well developed globally - ASEAN and India - #2 behind
margin in liquid laundry • #1 position, with a large gap
biggest opportunity in India. Unilever.
detergents in the U.S. (P&G - over the closest competitors • #2 position behind Unilever.
• Expanding into laundry - Large opportunity in India
60% market share vs. Vastar (Henkel and Unilever).
additives. Already participate where Unilever currently has
Capital Partners with 15%).
in 15 countries and plan to the largest market share.
enter 18 new markets in the
following 18 months.
Hair Care
• Potential for growth in hair
styling products where • #1 position in the region by a
penetration levels are slight margin - market shares
significantly below that of of leading companies
• Shampoo market share in the • P&G #2 position • Australasia, ASEAN and India
shampoos and conditioners. (Unilever, P&G and L'Oreal)
U.S.: P&G (38%), L'Oreal • 19% market share vs. L'Oreal -#2
• 34% market share in are all in the high teens.
(13%). with 33%. • Greater China - #1 position
developing markets in • Large opportunity to expand
shampoo. presence in Brazil (7%-8%
• Strong geographic presence market share).
with distribution in
approximately 150 countries.
Index

Small Opportunity Large Opportunity

Source: Credit Suisse Research; Team Research and Analysis 6

P&G Investment Opportunity Heat Map – U.S. Market

US Companies P&G Colgate Kimberly Chlorox

Organic growth steady - improving Organic growth likely to
value proposition (selectively cutting decelerate in 2010 as
Accelerating organic growth Organic growth projected flat to
price and expanding into lower tier) company laps last year's price Organic growth likely steady
profile down
pursuing emerging markets white increases - upside to
space and strong innovation pipeline expectations limited

Emerging Markets Exposure 34% 40-45% 30% 15%

Leading brands in many of its
Global leader in Oral Care with
Market leader in many of its disposable paper products Market leader in many core
Brand Strength (% of #1 / #2 dominant shares in most
categories (80% of U.S. sales from #1 portfolio (80% of U.S. Personal categories (80% of U.S. sales from
Brands in the U.S.) countries. Less strength in
or #2 brands. Care and Consumer Tissue #1 or #2 brands.
Personal Care and Home Care
sales from #1 or #2 brands).

Underlying Category Growth 2.30% 1.90% 3.40% 1.70%

Private label overlap Low Low Moderate High

Mildly innovative historically with
Most innovative company in the HPC
Innovative in lower profile successes in trash bags (Force
sector. History includes massive wins Multiple successes in Oral
Innovation categories. Technology leader in Flex) disinfectant wipes charcoal
in Detergents, Diapers and Care including Total toothpaste
Diapers. and natural home care (Green
Toothpaste.
Works).

Firmly entrenched as the premium Best positioned as the Average price point is 11% Average price point is 10% above
player in most of the categories in company competes in lower above category average category average driven by
Exposure to Lower/Middle
which it competes. (Average price price point categories and its primarily driven by higher price categories with high exposure to
Tier of Mass Channels
point is 16% above the industry average price point is 11% points in Diapers and Toilet private label (charcoal cat litter and
average). below the category average. Tissue. trash bags).

Sales ranging from $15-$80B and presence in over 150 countries provide significant scale and distinct Strong relative scale in its
Scale advantages including better leverage with retailers lower sourcing costs more resources for R&D larger categories. Technology its large cap
advertising budgets and funds to protect share from new competitors. peers.

CS Projects EPS Growth of 11-12% CS EPS growth rate of 10% is CS projects 7% EPS growth in CS EPS growth rate of 7-9% below
Potential Upside Expectations
vs. consensus of 10% in line with consensus line with consensus consensus of 9-11%
Index

Worst Positioned Best Positioned

Source: Team Research and Analysis 7

P&G Investment Opportunity Heat Map – European Market

European Companies Unilever Reckitt Benckiser Beiersdorf Henkel
Organic growth rate stable Organic growth will be likely
Accelerating organic growth Going forward, organic growth likely Organic growth likely to be plateau
and may pick up in coming steady as weak consumer will
profile to increase and then decelerate
years keep earnings growth in check

Emerging Markets Exposure 50% 27% 41% 14%

Leading skin care company in
European Market. Nivea is a
Leading Home and Personal Has leading brands in washing
Brand Strength (% of #1 / #2 Market leader in many of its value for money brand in
Care company with 17 power powder, dishwashing liquid/tablets
Brands in the Europe) categories Europe generates
brands and adhesives categories
approximately 75% of profits
for Beiersdorf.

Underlying Category Growth 3.50% 5% 1.20% 6.50%

Private label overlap Moderate Low Low Moderate

Innovation High High Moderate High

Exposure to Lower/Middle Due to wide product range, it has Premium positioning results Value for money positioning
Moderate exposure
Tier of Mass Channels exposure to lower/middle Tier in low exposure provides moderate exposure

Strong scale in Developed Low to moderate scale of
Large scale operation spanning Strong scale in skin care but
Scale market with renewed interest operating with main focus on
across the globe mostly Europe oriented
in developing markets Western Europe

Potential Upside EPS growth level expected is 21% EPS growth level
13% EPS growth level expected 19% EPS growth level expected
Expectations negative expected due to lower base
Index

Worst Positioned Best Positioned

• Reckitt Benckiser and P&G follow similar strategy of unrelenting focus on innovation for development of new product
 RB has had a consistent organic growth of over 5% while most companies failed to beat forecast
 OTC segment of RB will help P&G enter into one of the fastest growing segment which it had divested earlier
• Colgate will strengthen its position in emerging markets and make P&G the worldwide market leader in oral care
• Beiersdorf and P&G combined will become leader in Skin Care category in all but one (France) of Western Europe & US

Source: Team Research and Analysis 8

Reckitt Benckiser: An Opportunity - Organic Growth better than most and trading
well below its peers

Two year Average Organic Growth for Reckitt & its Peers Relatively Underpriced When Compared to its peers
9% 19 Beiersdorf
8% 18 L’Oreal
7% 17
Colgate
6% 16 Average Church &
5% Dwight

2011e PE
15 P&G
4% Reckitt
14
Clorox
3% Benckiser
13
2%
12 Henkel
1%
11
0%
10
Colgate Reckitt Henkel Beiersdorf Clorox P&G
Benckiser Consumer Consumer 10 12 14 16 18 20 22

Q109 Q209 Q309 Q409 Q110 Q210 2010e PE

• Reckitt has achieved an organic growth rate much higher than most of its peers in the last 6 quarters
• It has grown at a consistent rate of ~5% per annum, when its peers have been decelerating
• Moreover, Reckitt has managed to achieve this growth on a much stronger base from 2009 than most of its
peers who had relatively weaker bases
• P&G has witnessed stunted organic growth during this time
• Reckitt, by virtue of it competing with P&G across fewer segments than most of the peers, is an attractive target
• Reckitt is trading well below its peers despite superior top line growth profile

Source: Morgan Stanley Research; Team Research and Analysis 9

Reckitt Benckiser acquisition will give access to air care market while in
dishwashing, laundry market…

Dishwashing Combined Share Air Care Combined Share
70% 60%
60% 50%
50%
40%
40%
30%
30%
20% 20%

10% 10%
0% 0%

Unilever Henkel P&G RB Henkel SC Johnson P&G RB

Laundry Combined Share • In Dishwashing category, combined share of these
70% two companies makes them market leader in all
60%
regions except Middle East & Africa
50%
• In Air Care segment, Reckitt Benckiser will provide
40%
30%
P&G substantial market share across all regions.
20% Currently P&G has limited presence in this segment
10% with main focus on North America
0% • In Laundry segment, P&G is market leader in most of
the regions but Reckitt will provide 13% market share
in Australasia where P&G currently has little or no
Unilever Henkel P&G RB presence
Source: Euromonitor; Team Research and Analysis 10

… surface care, toilet care and polish market, it will lead the market across globe

Surface Care Combined Share Toilet Care Combined Share
60.0% 70%

50.0% 60%
50%
40.0%
40%
30.0%
30%
20.0%
20%
10.0% 10%
0.0% 0%
World Asia Pacific Australasia E. Europe Latin M. East & N. America W. Europe World Asia Pacific Australasia E. Europe Latin M. East & N. America W. Europe
America Africa America Africa

P&G RB Unilever SC Johnson Henkel P&G RB Unilever Henkel SC Johnson

Polishes Combined Share • In Polishes segment, P&G has no presence while
45%
Reckitt has substantial presence across all regions
36%
(top 2 in all markets)
27% • In Toilet Care segment, P&G has little or no presence
18% while Reckitt has 10+% market share in all the
9% regions with leadership position in North America
0% • In Surface Care segment, P&G and Reckitt combine
will attain market leadership in most of the regions
with over 36% market share in North America and
Henkel SC Johnson P&G RB
25% share world wide

Source: Euromonitor; Team Research and Analysis 11

P&G will be able to increase productivity of its R&D expenditure and will be able
to accelerate household penetration in developing markets

R&D Expenditure Productivity • In Depilatories Category, both of them have substantial
2,500 market share across the regions. Combined entity will
have 49% share world wide, 60% share in Western
Total R&D (USD mn)

2,000 P&G
Europe and 44% share in North America
1,500 Unilever • Looking at revenue generation per unit of R&D
1,000 L’Oreal
expenditure, Reckitt (60$ Per R&D $) leads the pack.
Beiersdorf
Acquisition of Reckitt will help P&G (40$ per R&D $) to
500 Henkel
make its R&D expenditure more productive and at the
Reckitt same time it will provide Reckitt brands with more fund for
0
CLX
0 20,000 40,000 60,000 80,000 100,000 innovation
Total Sales (USD mn)
Reasons for Acquisitions
• Sales growth due to complementary strengths in
Depilatories Combined Share
innovation and go-to-market capabilities
70%
60%
• P&G will get 17 industry leading power brands of Reckitt
50% with substantial market share across regions
40% • Economies of scale will help reduce cost and increase
30%
consumer value
20%
• Reckitt acquisition will help P&G to consolidate market
10%
0% share in developed market and accelerate household
penetration in developing market
• Reckitt has had consistent organic growth over years
• Both follow a culture of product uniqueness with focus on
Henkel SC Johnson P&G RB innovation, distinctiveness & problem solving

Source: Euromonitor; Credit Suisse Research; Team Analysis 12

Reckitt’s margins are relatively immune to the macroeconomic factors

Emerging Markets Europe
16% 16% 12% 30%
14% 14% 10%
25%
12% 12% 8%
10% 10% 6% 20%
8% 8% 4%
15%
2%
6% 6%
0% 10%
4% 4%
-2%
2% 2% 5%
-4%
0% 0% -6% 0%
-2% -2%

Margins Inflation GDP Margins Inflation GDP

Americas
6.0% 30%
• Margins are not impacted by macro economic factors
5.0% in emerging markets and Americas
25% • In fact in the emerging markets, the margins have
4.0%
3.0% 20% improved over the years
2.0%
15% • Margins in Europe are negatively correlated with
1.0% inflation while GDP growth has no effect
0.0% 10%
• The principal drivers of market growth in all markets
-1.0%
5% are the rate of household formation and growth in the
-2.0%
-3.0% 0% level of disposable income, combined with demand
for new products that offer improved performance or
greater convenience
Margins Inflation GDP

Source: Euromonitor; Morgan Stanley Research; Team Analysis 13

The deal is subject to high legal risk due to the possibility of antitrust suits arising
out of dominant market share in various categories

Key Risks
Product & Market Currently both P&G and Reckitt mainly compete in home & personal care market in N. America and W. Europe and
Overlap post merger positioning of respective brands needs to be considered
Integration Risk Owing to large size & geographic spread, failure in integration will adversely affect the combined entity
Cost of Integration The combined entity will incur signification transaction and integration charges
Considering the cross border nature of deal, proportion or cash and stock deal needs to be considered and P&G
Deal Structure needs to gauze the willingness of current share holders to accept stocks traded in another market
Reckitt has substantial exposure to European market and Pound-Dollar fluctuation needs to be considered for both
Currency Risk deal structure and also for operations
Combined entity will gain market leadership in large number of categories with market share over 50% in few
Legal Risk segments across the markets. This may trigger antitrust cases and the deal may not get executed ultimately
Cost of Borrowing Acquisition may adversely impact P&G’s cost of borrowing if debt increases substantially

Key Growth Drivers of Reckitt’s Revenues & Income
• Reckitt invests larger portion of its revenue for marketing and R&D as compared to its peers. Focus on a small set of power
brands helps it in quick development of innovative products & faster time to market
• Company’s sales are significantly biased towards Western Europe (mature market with intense price competition) and this
may weigh negatively on revenue growth
• Focus on single brand (Mortein) insecticide marketing in developing market will help it increase market share and this will
positively contribute to revenue growth. (In developing markets, health authorities and media have bolstered consumer
awareness of insect-borne diseases)
• Ability to generate new patents for drugs (Suboxone patent expiry will negatively impact the revenues from pharmaceuticals
segment)
• Owing to strong Free Cash Flow generation, Reckitt can go for inorganic growth (can spend up to £4B for acquisition)
• Health care contribution to top line has increased from 13% in 2000 to 40% today. This segment has higher margin when
compared to HPC category and SSL integration will act as a catalyst for next leg of growth of core business

Source: Team Analysis 14

Colgate Palmolive – An Alternative (1/2)

Combined Col-Pal P&G Market Share (%) Emerging Market Exposure
80
70
14% 19%
60
50
40 22%
30 45%
20
10
0

North America Europe/South Pacific
Asia/Africa/Latin America Pet Nutrition
Others P&G Colgate-Palmolive

Emerging Market Growth – Col-Pal vs. HPC Rationale for acquiring Colgate-Palmolive
12% • Colgate-Palmolive is the worldwide leader in the Oral Care
10% 9.5% 9.6% 9.7% segment with P&G as No. 2.
8.0% 8.1% • Col-Pal has large emerging markets exposure - a segment
8% 7.5%
6.9% 6.7% expected to grow fastest in the near future
6% 5.3% 5.5% • The acquisition would give P&G a dominant share across
the dental care categories and geographies
4% 2.7% • It would also lead to various revenue & cost synergies for
2% P&G since it will gain access to wider markets and
0.7%
distribution networks
0% • Col-Pal has least exposure to private label market share
2005 2006 2007 2008 2009 2010-12E (10.5%) among all its peers, thus shielding it from down-
HPC Emerging Market Growth Colgate Emerging Market Growth trade risk


Beiersdorf – An Alternative (2/2)

Combined Skin Care Market Share Beiersdorf Emerging Market Exposure
50%
6%
40% 37%
34% 34%
30% 41%
25%
22%
20% 16% 53%

10%

0%
Germany France Italy Great Spain U.S.
Britain
Unilever L'Oreal P&G Beiersdorf N. America W. Europe Emerging Markets

Combined Deodorant Market Share • In W. Europe, P&G and Beiersdorf combine will lead
70% all markets except France in skin care segment
58%
60% • Beiersdorf has substantial emerging market exposure
50% of 40% much higher than its rival (L’Oreal 33%)
40% • Combination would result in strengthened position in
30% 32% 32%
30%
28% deodorant market
19% • Beiersdorf will provide P&G an entry into Luxury and
20%
drug/pharmacy with La Prairie (high end brand) and
10%
Eucerin (medical skin care brand)
0%
• Combined entity will be able to generate higher
Germany France Italy Great Spain U.S. synergies in emerging markets with competitive
Britain
Unilever L'Oreal P&G Beiersdorf position in skin care in Vietnam, Malaysia & China


On Standalone basis, per share price of Reckitt Benckiser is worth $54.6 while
using average of price obtained through several valuation methods

Triangulation of Share Price Sensitivity Analysis of DCF Valuation
$120 Perpetuity Growth Rate
Transaction WACC
1.00% 1.50% 2.00% 2.50% 3.00%
$100 7.50% $66.97 $70.45 $74.56 $79.50 $85.53
DCF
8.00% $62.03 $64.90 $68.24 $72.20 $76.95
$80 Peer 8.50% $57.75 $60.14 $62.91 $66.13 $69.93
9.00% $54.02 $56.03 $58.33 $60.99 $64.09
$60 9.50% $50.73 $52.44 $54.38 $56.59 $59.15
10.00% $47.81 $49.27 $50.92 $52.79 $54.92
$40 10.50% $45.20 $46.46 $47.87 $49.46 $51.26
EV/EBITDA
Market Valuation Methodology Share Price
$20 Price: $50 DCF $58.33
EV/EBITDA Multiple $45.03
$0 P/E Multiple $54.14
Transaction Comparable $60.81
Average $54.58

Key assumptions for DCF valuation of Reckitt Benckiser
• Sales in pharma segment are expected to be hit in 2011 due to expiry of exclusivity for Suboxone in US from Oct 2009 and
launch of generic version in 4Q10
• Pharma sales are expected to recover from 2012 as Reckitt takes distribution of suboxone in Europe from Schering Plough
Inc. helping the company to post high margins in pharma division
• Fabric Care segment is expected to languish owing to new launches by P&G in Western Europe
• Revenue Growth to be mainly driven by developing markets while revenues from Europe are only expected to see organic
growth from 2012 onwards
• Organic revenue growth expected to stabilize at 5% from 2014 while perpetuity growth rate is assumed as 2%
• Cash flows are discounted at a WACC of 9% with cost of equity at 9.8% and beta of stock at 1.1
• EBITDA margins are expected to stabilize at 25.1% in the long run and the company is expected to maintain a payout ratio
of 50% in the future

Note: GBP|USD exchange rate has been taken as 1.5523 which is spot rate as of 30th Aug 2010 17

P&G will be able to realize synergies of more than $5 billion by acquiring Reckitt
Benckiser should pay per share price between $52 and $66 for this transaction

Triangulation of Share Price Date Acquirer Target
Deal Size
Premium
($ million)
$120.00 2010 Schlumberger Ltd. Smith International, Inc. 11,065.13 38%
Transaction 2010 Novartis AG Alcon, Inc. 28,093.73 22%
2009 Exxon Mobil Corp. XTO Energy, Inc. 30,208.35 25%
$100.00
DCF Burlington Northern Santa Fe
2009 Berkshire Hathaway, Inc. 26,783.62 31%
Corp.
$80.00 Peer 2009 Kraft Foods, Inc. Cadbury Ltd. 19,145.29 48%
$67 2009 Gas Natural SDG SA Union Fenosa SA 11,164.21 15%
$60.00 2009 Suncor Energy, Inc. Petro-Canada 15,744.95 28%
$52 2009 Merck & Co., Inc. Schering-Plough Corp. 38,406.36 34%
$40.00 2009 Pfizer, Inc. Wyeth 67,003.85 32%
EV/EBITDA 2008 Wells Fargo & Co. Wachovia Corp. 15,127.19
Market 80%
$20.00 Price: $50 2008 Bank of America Corp. Merrill Lynch & Co., Inc. 46,391.47 70%
2008 Altria Group, Inc. UST, Inc. 10,313.39 20%
$0.00 2008 Gas Natural SDG SA Union Fenosa SA 11,807.68 15%
2008 Teck Cominco Ltd. Fording Canadian Coal Trust 10,668.83 18%
2008 Roche Holding AG Genentech, Inc. 44,291.31 9%
• Organic revenue growth is expected to accelerate by 2008 The Dow Chemical Co. Rohm & Haas Co. 15,230.88 74%
50bps from 2014 owing to increasing penetration of 2008 InBev SA Anheuser-Busch Cos., Inc. 50,613.03 35%
Reckitt’s brands in developing markets 2008 Westpac Banking Corp. St. George Bank Ltd. 18,131.75 29%
• Cost saving synergies to accrue fully from 2013 with 2008 Hewlett-Packard Co.
Electronic Data Systems
12,631.35 33%
Corp.
EBITDA margins expected to expand by 50 bps
2008 Mars, Inc. William Wrigley Jr. Co. 21,816.59 28%
• P&G will be able to realize synergies of $6.00 billion in 2008 Novartis AG Alcon, Inc. 10,538.47 12%
form of accelerated revenue growth and cost savings from Aluminum Corp. of China
2008 Rio Tinto Plc 14,135.25 21%
this acquisition Ltd.
2008 CME Group, Inc. NYMEX Holdings, Inc. 11,071.73
• Offer price should not exceed $67 per share as the effect 11%
2008 Sunrise Acquisitions Ltd. Scottish & Newcastle Plc 15,046.36 51%
of synergies will go off beyond this price
Average 32%
• At $67 per share, shareholders of Reckitt will receive a
premium of 31% over the closing price on 30th Aug
2010, a day before the announcement of merger

Note: GBP|USD exchange rate has been taken as 1.5523 which is spot rate as of 30th Aug 2010 18

Standalone Valuation of Reckitt Benckiser

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E
EBIT 2,021.25 2,081.63 2,192.51 2,307.50 2,422.87 2,544.02 2,671.22 2,804.78 2,945.02 3,092.27
Effective tax rate 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%
NOPLAT 1,515.94 1,561.23 1,644.38 1,730.62 1,817.15 1,908.01 2,003.41 2,103.58 2,208.76 2,319.20
Depreciation & Amortization 122.75 125.4 133.96 143.92 151.11 158.67 166.6 174.93 183.68 192.86
Change in working capital -6.09 18.7 60.4 70.24 50.76 53.3 55.97 58.76 61.7 64.79
Capex -188.21 -192.28 -205.41 -220.68 -231.71 -243.29 -255.46 -268.23 -281.64 -295.73
Free Cash flow 1,444.38 1,513.05 1,633.34 1,724.11 1,787.32 1,876.69 1,970.52 2,069.05 2,172.50 2,281.13
% Growth 4.80% 7.90% 5.60% 3.70% 5.00% 5.00% 5.00% 5.00% 5.00%
As % of sales 17.70% 18.10% 18.30% 18.00% 17.70% 17.70% 17.70% 17.70% 17.70% 17.70%
PV of Free Cash flow 1,403.48 1,348.81 1,335.82 1,293.63 1,230.33 1,185.18 1,141.69 1,099.79 1,059.43 1,020.55
Perpetuity Growth Rate 2%
WACC 9.00%
Terminal Value 33,239.28 Firm Value FV/
PV of Terminal Value 14,870.91 Date Target Acquirer (US$mm) revenue FV/EBITDA
Firm Value 26,989.62 10-May Smashbox Estee Lauder 2,501 2.6x 16.0x
Net Debt -215 10-Jan Bare Escentuals Shiseido 1,700 3.1x 10.3x
Pension Liability 371 9-Nov Cadbury Kraft 13,234 2.1x 13.0x
Equity Value 26,833.62 9-Sep Sara Lee HPC Unilever 1,874 1.7x 10.0x
Per share value £ 37.63 8-Jun Clarins Financiere FC 3,883 2.4x 16.7x
8-Apr Wrigley Mars 23,372 4.3x 19.6x
8-Mar Frederic Fekkai P&G 420 4.7x 23.3x
EV/Sales EV/EBITDA P/E 8-Jan YSL Beaute L'Oreal 1,666 1.8x 22.3x
2010E 2011E 2010E 2011E 2010E 2011E 7-Oct Burt's Bees Clorox 925 5.4x 18.1x
Unilever N.V. 1.6x 1.5x 9.8x 8.9x 14.9x 13.5x 7-Jul Playtex Energizer 1,880 2.5x 13.6x
Procter & Gamble 2.6x 2.5x 10.3x 9.7x 14.7x 14.4x 7-Jul Numico Danone 12,225 4.3x 21.7x
7-Jul Danone Kraft 5,475 2.7x 13.6x
Colgate Palmolive 2.6x 2.5x 9.7x 9.1x 15.4x 14.2x
7-Apr Gerber Nestlé 4,093 3.0x 16.4x
Henkel AG 1.3x 1.3x 8.9x 8.1x 14.2x 12.7x
6-Dec Novartis Nestlé 1,894 2.7x 19.5x
Clorox Co. 2.1x 2.0x 9.0x 8.5x 14.6x 13.4x
6-Mar Body Shop L'Oréal 1,141 1.5x 11.9x
Church & Dwight Co. 1.8x 1.7x 8.5x 7.9x 15.3x 13.8x
5-Jan Gillette P&G 57,602 5.8x 19.2x
Oriflame 1.8x 1.6x 13.1x 11.3x 18.5x 15.7x 3-Oct Beiersdorf Tchibo Holding 12,129 2.2x 16.3x
L'oreal 2.5x 2.4x 12.3x 11.1x 20.4x 18.0x 3-Mar Wella P&G 6,590 1.9x 15.3x
Beiersdorf 1.4x 1.3x 10.2x 9.7x 21.3x 19.7x 1-May Clairol P&G 4,950 3.1x 14.9x
Mean 2.0x 1.9x 10.2x 9.4x 16.6x 15.0x Average 3.0x 16.4x
Average Share Price 22.35 21.67 29.87 28.23 35.85 34.01 Median 2.7x 16.3x

19

P&G should acquire Reckitt Benckiser in all stock deal by issuing depository
receipts to shareholders

• P&G will offer between 0.9193 and 1.1285 shares of P&G for every share of Reckitt Benckiser
 Price has been set using $59.37, the closing price of P&G common stock on 30 th Aug 2010 and an exchange rate of
$1.5523 to £1.00 (as of 30th Aug 2010)

• P&G would need to issue a maximum of 804.3 million shares of P&G in form of Depository Receipts
to shareholders of Reckitt Benckiser in this deal
No. of Share outstanding Shares to be issued by
Offer Price Share Price of P&G Swap Ratio
for Reckitt (in million) P&G (in million)
$67 $59.37 1.1285 713 804.63
 Depository receipts will be treated as common stock of P&G and will lead to 3.644 billion common shares outstanding
of the combined company
 Shares issued to shareholders of Reckitt Benckiser will represent approximately 22 percent of the outstanding P&G
stock after the merger
 P&G will pursue an extensive stock repurchase program over the next 3 years to soften the impact of stock dilution
 P&G followed a similar stock repurchase program after the purchase of Gillette

• JAB Holdings B.V., majority shareholder in Reckitt Benckiser will prefer stock deal vis-à-vis cash
 JAB Holdings promoted by Benckiser Family owns more than 15 percent in the current company and would prefer
stock deal as a cash deal would put huge tax liability on them

• P&G should retain the top management of Reckitt Benckiser after the deal
 Top management of Reckitt Benckiser is considered one of the best in industry and it has consistently delivered top
performance over the years

20

Appendix A: Majority of P&G revenues are contributed by developed markets with
developing markets contributing only 34%

P&G Segmental Revenue Category wise Geography Split
$79.3B $76.7B $78.9B 100%
100% 20% 20% 25%
35% 30% 33%
80% 45%
80%
60%
60%

40% 40% 80% 80% 75%
65% 70% 67%
55%
20% 20%

0% 0%
2008 2009 2010 Beauty Grooming Health Snacks & Fabric & Baby P&G
Fabric Care and Home Care Beauty Care Pet Care Home Care &
Baby & Family Care Health Care Care Family
Care
Grooming Snacks & Coffee Developed Emerging

P&G Geographical Revenue Mix P&G Emerging Markets Revenue Share
80,000 3,154
2,611 7,104
6,902
9,970 10,262
60,000
35% 34%
33%
USD Million

11,504 11,841 32%
40,000 16,577 30% 29%
16,106
26%
20,000 25% 23%
29,600 30,000
21%
20% 20%
0 20%
FY2009 FY2010
United States Western Europe Asia 15%
CEEMEA Latin America Canada 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: P&G Company Data; Jefferies Research; Morgan Stanley Research; Credit Suisse Research 21

Appendix B: Reckitt Benckiser’s Power Brands

Reckitt Benckiser has a highly focused portfolio with 17 Power brands that represent 70% of net revenues:

Fabric Care:
Fabric Treatment worldwide #1 – led by Vanish
Water Softeners worldwide #1 – led by Calgon
Garment Care worldwide #2 – led by Woolite
Surface Care: worldwide #1 – driven by:
Multipurpose Cleaners - Dettol and Bang worldwide #1 – led by Lysol
Lavatory Care worldwide #1 – led by Harpic & Lysol
Dishwashing:
Automatic Dishwashing worldwide #1 – led by Finish
Home Care:
Air Care worldwide #2 – led by Airwick
Pest Control worldwide # 2 – led by Mortein
Personal Care:
Antiseptic Personal Care worldwide #1 – led by Dettol
Depilatories worldwide #1 – led by Veet
Acne Treatment worldwide #2 – led by Clearasil
Health Care:
Medicated Sore Throat Relief worldwide #1 – led by Strepsils
Cough Relief worldwide #2 – led by Mucinex
Leading positions in Analgesics and Upper Gastro
Intestinal Relief in Europe and Australia led by Nurofen
and Gaviscon

Food:
Mustard worldwide #1 – led by French’s

Source: Team Analysis 22

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