Unilever Looking To Increase Stake In HUL

The 50-billion Euro consumer giant, Unilever Plc has launched an open offer to increase its stake in its Indian unit Hindustan Unilever (HUL) to 75 per cent. The parent company presently holds 52.48% in HUL. The open offer of USD 5.4 billon (Rs 29000 crore) is certainly a sign that Unilever is bullish on the Indian consumption story.

The offer opens on June 21 and ends on July 4, 2013. If the offer goes through, it will be the fifth largest India-bound M&A deal.

In an analysis, Forbes magazine has been seen that by buying into the Indian subsidiary, Paul Polman, CEO, Unilever is getting a higher return on capital than the cost of borrowing. With cash reserves of 3 billion Euro, Unilever would have to borrow very little to pay for the additional stake in HUL.

It is quite clear that institutions (which cumulatively have 30.17% stake in HUL as of March 2013) hold the key to the success of the offer made by Unilever. A national daily has quoted that two largest holders, LIC and Aberdeen have said that they will not tender their shares at the offered price of Rs 600 per share. The point at this juncture is whether Indian investors should tender their shares in the open offer or not.

Let us now consider the reasons in favour of tendering your shares for the open offer. First and the foremost is the company’s valuations. HUL’s stock is currently trading at a PE multiple of around 40x, which is high by any standards. Secondly, it has been seen historically that after the end of an open offer the prices tend to move southwards, and this cannot be ruled out in this case too. Thirdly, you will be eligible for a dividend of Rs 6 per share even if you tender you shares for the open offer.

Now, take the flip side look at why you should not participate in this open offer. First, there is not much difference in the price offered and the current market price which is hovering around Rs 595 per share. Secondly, there would be some tax implications as an open offer is considered as an off-market transaction. Thirdly, the public float will decrease if the open offer goes through, which can also be a problem for institutions or HNIs looking to buy out large quantities. Finally, it goes without saying that HUL is the best player in the Indian consumption story.

The pros and cons of the offer apart, the parent company is undoubtedly bullish on the Indian side and hopes to churn out more from this market going forward. However, we feel that it is better for the minority shareholders to take some profits off the shelf as of now. But the success of the offer will certainly depend on institutions. Depending on the success of the offer, other MNCs like Nestle and P&G may also follow suit.