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What you should know about $5.4bn Unilever offer
Unilever, the Anglo-Dutch consumer goods giant, is looking to consolidate stake in Hindustan Unilever (HUL), India's largest fast-moving consumer goods (FMCG) company, to 75% from the current 52.48%. The company is offering to pay US$5.4 billion for this stake at Rs 600 per share. This is one of the biggest offering witnessed in recent times.
Here are a few things you need to know:
Why is Unilever doing this? Unilever wants a bigger slice of HUL’s profit. Emerging markets bring in more than half the revenues for Unilever and India is already the company's second largest market (along with Brazil) after the US, according to the company. This move is also in line with Unilever's global strategy of owning substantial stake in its subsidiaries in emerging markets, such as Indonesia (owns 85%) and Pakistan (where it owns over 75% and has offered to delist). Unilever’s move to increase stake in its Indian subsidiary is a positive vote on India. They expect HUL to perform well in the coming years and want a greater share in its profits and sales. HUL has doubled its sales in the last six years and they expect this momentum to continue. This also signals the global consumer giant’s confidence that despite concerns over slow growth in India, the rising consumption would continue to drive up volumes going forward.
What is in it for HUL shareholders? Unilever is offering Rs 600 per share to shareholders. The current share price is close to that value. It is important to keep an eye on the situation and watch reports in newspapers and television closely before deciding on tendering shares. Last week, the company announced results for the quarter to March 2013. Despite a decent quarter, the company is likely to see challenges for profit growth going ahead, said Kotak Securities in a note after the results. This indicates that without the Unilever offer, there are not many reasons for HUL shares to rally. Media reports quoted analysts suggesting to investors to hold on to their shares and not tender them in the offer. A promoter raising stakes in the company is a positive indicator of future growth prospects.
What does this mean for the Indian consumer sector? India has been battling serious growth concerns in the last year, clocking the slowest growth in almost a decade. The Indian consumer sector has witnessed slowing sales. Foreign companies like HUL have witnessed profits getting squeezed due to a stiff competition from home grown players. However, Unilever's offer to increase its stake in the Indian company shows that the company has confidence in the Indian economy and the country's growth story. The company is making its biggest deal in over a decade, showing that the Indian consumer sector is a pie big enough for all players. It is willing to pay a significant premium to acquire these shares. According to Thomson Reuters, Unilever is paying nearly 36 times the company's forecast earnings per share for the year ending March 2014. This is primarily because developed markets are seeing stunted growth in the last few years for many consumer sector players. This has clearly shifted focus to emerging markets such as India, China, Brazil, Turkey, Indonesia, Thailand and others. In case of Unilever, emerging markets now account for over 55% of global revenue.
Unilever's bid for an over 22% stake in HUL is the largest inbound investment in India in 2013 and fifth biggest ever, according to the Times of India. The company is spending Rs 29,220 crore. This is a positive development for the government too. It is trying to attract foreign institutional investors around the world to bring in more money to Indian markets to finance the current account deficit. A transaction of this scale is good news for the economy too.