Unilever Fails to Gain 75% Control of Hindustan Unilever

Unilever (UNA) fell short on its public offer to raise its majority holding in Hindustan Unilever Ltd. (HUVR) to 75 percent, ending up with about a two-thirds stake after some shareholders of the Mumbai-based company opted not to sell.

Unilever's bid of 600 rupees a share -- close to the July 4 closing price of 601.40 rupees -- gave it 67 percent, up from 52 percent before the offer, the company said in a statement late yesterday. The offer price valued the transaction at about 2.45 billion euros ($3.2 billion).

The result reduces the profit Unilever can squeeze out of the Indian unit and could force the London- and Rotterdam-based company to pay more for a bigger stake later. Analysts said it wouldn't change their outlook on the maker of Dove soaps and Lipton tea. Some Hindustan Unilever investors chose to keep their money in an entity that serves as a proxy for consumer demand in Asia's third-largest economy.

"For Unilever this a clear win -- I think they got more than what the market expected," said Vivek Veda, a consumer analyst at Espirito Santo Securities in Mumbai. "This would also help bring in dollars into the country and ease pressure on the rupee, at least for the time being."

India's rupee headed for a ninth weekly drop, the longest losing streak in a year, after foreign funds continued to pull money from the nation's debt.

Unilever has no plans for a future offer for Hindustan Unilever, said company spokeswoman Lucila Zambrano. In any case, it would be unable to start any offer until the end of Hindustan Unilever's fiscal year, she said.

Share Tender

Hindustan Unilever shares rose as much as 5.1 percent to a record 632 rupees, before trading at 607.3 rupees at 12:40 p.m. in Mumbai. The S&P BSE Sensex index rose 0.8 percent. Unilever fell 0.1 percent to 31.07 euros at 9:10 a.m. in Amsterdam.

Investors were also swayed by the tax burden of tendering their shares, according to Anubhav Malhotra, an analyst at Liberum Capital Inc. in New York. Tendering shares in the open offer would trigger a tax of about 21 percent on the capital gains adjusted with a government-provided index for inflation, said Ketan Dalal, joint tax leader for consultant PricewaterhouseCoopers. Shareholders selling the stock in the open market pay a 0.1 percent tax on the entire transaction, which may likely work out to less.

Potential Valuation

"I wouldn't necessarily offer all the shares that we have," Adrian Lim, a portfolio manager at Aberdeen Asset Management Asia Ltd., said in July 2 Bloomberg TV interview. Aberdeen is the third-biggest shareholder in Hindustan Unilever, with a 4.4 percent stake as of May 31.

Unilever has sought greater control of India's largest consumer-goods maker as its growth in Europe ebbs. Developing markets will account for more than 90 percent of its annual sales growth this decade. The company is scheduled to report first-half results July 25.

Unilever's plan to boost its stake came after its January decision to increase the royalty the Indian unit pays to 3.15 percent of revenue, up from 1.4 percent, over five years.

Hindustan Unilever's shares plunged the most in two years after the royalty announcement. Had the royalty not been boosted, Unilever would have had to offer about 700 rupees a share, estimated Nitin Mathur, an analyst at Espirito Santo.

Third-Largest Market

The offer valued Hindustan Unilever at 37 times the subsidiary's earnings before interest, taxes, depreciation and amortization. The median multiple for similar deals was 10.8 times Ebitda, according to data compiled by Bloomberg.

Unilever's Indian business started more than a century ago when British soap maker Lever & Co. introduced the Sunlight brand. India is now Unilever's third-largest market, accounting for about 8 percent of sales, according to Bernstein Research. On average, its products command a 40 percent market share in India, higher than in any other country where it operates, Liberum estimates.

"The potential of India's consumerville is rightly regarded as huge, and Hindustan Unilever is the de facto play in the space," said Jon Cox, an analyst at Kepler Capital Markets SA in Zurich. "Foreign investors would rather stay invested."