Unilever offers $5.4 billion to raise HUL stake; stock soars

Unilever plans to pay up to $5.4 billion to raise its stake in its Indian subsidiary, making its biggest deal in 13 years a huge bet on the strength of demand for personal care and food products in Asia's third-largest economy. The Anglo-Dutch giant said it planned to lift its share in Hindustan Unilever, India's largest consumer goods maker, known for its Dove and Lipton brands, to as much as 75 per cent from 52 per cent at present. The deal, the largest single investment in the Indian consumer goods sector, is a major vote of confidence in the Indian economy, where growth is at its lowest for a decade. It fits Unilever's strategy of increasing its presence in fast-growing markets. Emerging markets, which make up 57 per cent of its turnover, have contributed double-digit growth in recent quarters. That contrasts with rivals who have been slower to move into fast-growth regions. Unilever's main household products rival Procter & Gamble has been shedding jobs, while Danone is the most exposed among the big food groups to the euro zone crisis. "The long heritage and great brands of Hindustan Unilever, and the significant growth potential of a country with 1.3 billion people, makes India a strategic long-term priority for the business," said Unilever chief executive Paul Polman. The bid at Rs 600 per share - 20.6 per cent over Monday's closing price - sent shares in Hindustan Unilever surging as much as 20 per cent to an all-time high early on Tuesday. But the firm, formed in 1956, generally trades at a heady multiple, and several market watchers said investors might be unwilling to part with their shares at the offer price. Unilever is paying nearly 36 times the unit's forecast earnings for the year ending March 2014, according to Thomson Reuters data. It trades on a price/earnings ratio for the next 12 months of 29.5, compared with 19 for Unilever. Its 2012 return on equity was 87 per cent, well ahead of an industry mean of 66.5 per cent. "Many of the foreign funds or institutional investors hold the stock and when they play the India growth story they love to play it with HUL (Hindustan Unilever)," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance, which holds shares in the company. "It is a very attractive stock and the quality of management is the best. So, given these factors, investors will not sell so easily," he said. PRICE WAR On Monday, Hindustan Unilever, whose brands include Rin bar soap and Lakme skincare products, beat expectations with a 15 per cent increase in earnings in January-March. However, it has been forced to wage a price war against lesser-known brands as it seeks to reverse four consecutive quarters of slowing sales growth and win back increasingly thrifty shoppers. "The price is pretty heavy, on conventional metrics, but it's a high-growth business, India is a massive market and the cost of funding for Unilever is pretty low," one fund manager at a top-30 shareholder institution told Reuters. "All the growth is coming from emerging markets, and there is a race to grow in these markets." Analysts at Deutsche Bank said they expected the transaction potentially to add 1-2 per cent to the group earnings per share. In terms of turnover, the United States ranks as the biggest market for Unilever, with India and Brazil tied in second place. The offer, payable in cash, is expected to begin in June. In a similar deal in November, UK-based GlaxoSmithKline offered to buy a further 31.8 per cent in its Indian consumer products business for about $940 million. That offer ended up lifting the parent's stake to 72.5 per cent, just shy of its 75 per cent target. SLOW ECONOMY, BIG POTENTIAL The Indian economy is likely to have grown at just 5 percent in the fiscal year that ended in March, far below the government's double-digit ambitions, and foreign direct investment has been relatively sluggish as companies worry about bureaucratic red tape and uncertain regulation. Still, several recent deals point to robust corporate interest in long-term spending growth in India. The country is one of the fastest growing consumer markets in the world along with China, Mexico, South Africa and Turkey. In the last few months, Abu Dhabi's Etihad Airways, the Swedish clothing chain Hennes & Mauritz and British spirits giant Diageo have all announced big investments in India, while automakers are adding plant capacity despite a decline in sales. Last week, Unilever, which makes products including detergent, soap, margarine and ice cream, posted weaker-than-expected first-quarter sales growth of 4.9 per cent for the three months to March 31. Growth in emerging markets was 10.4 per cent. Numerous global companies have Indian-listed subsidiaries, the legacy of earlier ownership caps. Two investment bankers who declined to be named said they expected more expansion of the stakes, especially in consumption-driven sectors. While many global companies have considered delisting their local units, some have been deterred by the high cost of buying out minority shareholders when the public shareholding is reduced below 25 per cent. James Allison, Unilever's head of investor relations and M&A, told a television channel that it would not increase the offer. "We will hold talks with institutional shareholders in India next week ... at the end, if we don't get all the 22 per cent, so be it," he said. HSBC is the manager of the Unilever offer. Copyright @ Thomson Reuters 2013

Unilever offers $5.4 billion to raise HUL stake; stock soars

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