The tab for the open offer will be R29,220 crore ($5.4 billion) and, if fully successful, will take Unilevers stake in HUL to 75%, the maximum that can be held by promoters if the stock is to stay listed. Unilever, which currently holds a stake of 52.48%, wants to buy up to 48.7 crore more shares or 22.52% of the total outstanding shares of HUL. The open offer is expected to begin in June 2013, subject to regulatory clearances.
The open offer marks the latest international corporate bet on long-term consumer demand in India despite tepid economic growth. The offer price of R600 values the stock at a multiple of 35 times one-year forward estimated earnings, above the historical trading range for HUL of between 25 and 30 times, a sign of how confident Unilever is about its prospects in India.
Nikhil Vora, managing director, IDFC Securities, said the price offered was a thumbs-up for the Indian consumer space, which was likely to get re-rated. Shareholders might want to trade their HUL stock and buy into other consumer goods companies, Vora said, adding there was no compulsive need to own HUL at these valuations.
The long-term growth potential of emerging markets is central to our strategy we already have over 57% of our turnover coming from emerging markets, James Allison, head of investor relations and M&A at Unilever, said. This represents a further step in Unilevers strategy to invest in emerging markets and to increase our exposure to countries which offer great structural growth potential through population growth and rising income per capita.
The HUL stock has been a favourite with investors having rarely underperformed the market and with the FMCG major having been generous with dividends average dividend payout in the last 15 years has been 80%.
Between March 1991 and now, the stock has returned 5,158%, compared with a gain of 1,168% for the Sensex. The only other stock that has outdone HUL in the consumer space is ITC which gained 23,061% between March 1991 and now but ITCs dividend payout has been smaller at 44%. HULs market capitalisation is currently Rs 1.26 lakh crore compared with ITCs Rs 2.6 lakh crore.
Over the past 10 years, the companys net profit has more than doubled to Rs 3,828 crore for FY13 on a consolidated basis, with more than 50% of the increase coming in the last five years. Meanwhile, revenues have increased 25% to Rs 26,317 crore in FY13 since the company changed its accounting period four years ago.
Several global companies have considered delisting their local units but some have been deterred by the high cost of buying out minority shareholders. Several market watchers said investors might be unwilling to part with their shares at the offer price, which could force Unilever to settle for a smaller stake or raise its offer price, but Unilever was keen to stress that it was paying a fair price.
The offer is being made at a premium of 26% to the one month average price, 25% to the last one week average price and 29.5% over the mandatory floor price required under Indian regulations. We think we are paying a fair price, Unilevers Allison said. According to the companys website, HULs shareholding is distributed among about 3.6 lakh individual shareholders and financial institutions.
In a similar deal last November, UK-based GlaxoSmithKline Plc offered to buy a further 31.8% stake in its Indian consumer products business for about $940 million, lifting the parent companys stake to 72.5%, just shy of its 75% target. The company traces its roots back to 1931 when Unilever set up its first Indian subsidiary, Hindustan Vanaspati Manufacturing Company, followed by Lever Brothers India Limited (1933) and United Traders Limited (1935). These three companies merged to form HUL in November 1956.