Unilever's Bargain Offer: Should You Hold On or Tender Your Shares?
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n April 30, Ramesh Damani was in for a pleasant surprise. The value of a substantial holding in his portfolio, Hindustan Unilever (HUL), had overnight zoomed 20 percent on the back of the news that Unilever was launching an open offer to buy back HUL shares. “I was jubilant,” says Damani, a successful stock market investor. “There’s no way I’ll be surrendering my shares at these prices,” he says.
Damani had every reason to be happy. He’d long argued that the world over, consumer businesses were among the best to own as investors looked for stable growth, good cash flows and, in time, a high price to earnings multiple (PE). Now, he’d received an endorsement from the strongest possible source: Paul Polman, the global boss of the €50 billion consumer packaged goods giant Unilever, the world’s second biggest consumer packaged goods firm.
While both Damani and Polman may have different reasons for their bullishness, the net result is the same—consumer businesses in India are extremely valuable. In the last five years, the BSE FMCG index has returned 242 percent, the highest among any index.
Polman, who sees emerging markets (they bring in 55 percent of revenue) as the next big lever of Unilever’s growth story, is investing big in the India growth story. After HUL hit its stride in the last four years, its parent company believes that this is an opportune time to invest in the next phase of growth in India.
At $5.4 billion (Rs 29,220 crore), this ranks as the largest open offer for an Indian company by its global parent. Simply put, HUL will pay shareholders Rs 600 a share for every share tendered—a 20.3 percent premium. In November, GSK Consumer had spent Rs 5,221 crore to buy back shares in its Indian subsidiary. With strong growth in the Indian consumer market, analysts at IDFC expect subsidiaries of Nestle, P&G Hygiene and Colgate Palmolive to follow suit.
That’s why Polman’s open offer holds an interesting mirror to the Indian growth story. On the one hand, the fact that global firms like Unilever see higher potential for growth and earnings in markets like India, compared to their home markets in Europe and US, is beyond doubt. This current surge in confidence comes at a time when simmering doubts about the inherent strengths of developing and emerging markets, particularly in the last two years, have cast a pall of gloom over the broader investment climate.
Yet, whether this decisive shift in the balance of power towards emerging markets translates into rich pickings for Indian investors is far from clear. For instance, would Damani be better off staying invested in Hindustan Unilever? Or should he tender in his shares and seek to earn higher returns from a clutch of other consumer stocks that may not quite have the sheen or pedigree of a HUL stock but have generated consistently higher returns?
We’ll get to that in a bit. But first, what made Polman craft his open offer in the first place?
The India Logic
It’s not hard to see why he took this bold call. When he took over at Unilever in 2009, Polman had laid out an ambitious goal—to double revenues. While he’s not set a timeframe, Polman has emphasised that it wasn’t the €80 billion number in itself that was important, but inculcating a mindset of growth that was crucial to the company.
In the last three years, Unilever has made rapid strides in getting there. Polman has managed to add €10 billion to take the topline to €50 billion in the last three years. And a bulk of that growth came from emerging markets. While mature markets like the US and Europe have slowed, Unilever’s subsidiaries in places like India, Indonesia and Nigeria have been firing on all cylinders. Profits growth at HUL, for instance, has increased to 11.4 percent a year in the last five years, versus 5.2 a year in the last decade.
But there’s one big hole in Unilever’s portfolio: China. Here, Unilever has some catching up to do. Analysts estimate that P&G is eight times larger than Unilever (both companies do not break out individual country sales). Polman realises that bridging the gap in China is not going to be easy. Instead, according to a chief investment officer at a leading local fund house who prefers to remain anonymous, the open offer may be a signal that Polman may have decided to instead hitch a ride with the Indian growth story.
“From Unilever’s perspective, given their low cost of capital and long time horizon, much longer than even for long-term investors, a 2.6 percent return on capital in euro terms that would grow further over the years would make sense,” says Bharat Shah, executive director at ASK Group.