Indeed, it is hard to tell if Unilever is a master at dealing with emerging markets, or if it is blinded by potential riches. The group said it would pay EUR4.1bn for an additional 22.5% stake in Hindustan Unilever (HUL), thereby raising its share in the India-listed unit to 75%—the maximum permissible under the country’s rules.
The reason for the move is clear—Unilever’s traditional European markets are mature and shrinking, while India’s potential is immeasurable. To consolidate more profits from HUL’s fast-growing food and personal care business right now is a very attractive proposition.
But is it really worth offering the equivalent of 36 times consensus earnings for the year until March 2014? This corresponds to several times the level Unilever was bringing in at its peak in 2006, even though analysts expect HUL’s earnings to grow 10% this fiscal year.
Some of the analysts also suggest that Unilever left its shares on the market in India for too long, with stock rising at an annual rate of 15% over the last 20 years as profits surged.
Better late than never
“If Unilever had owned a 75% stake last year it would have reduce its minority charge by around €100m,” said Graham Jones, Panmure’s consumer staples head, in a recent note to investors. “The performance of Hindustan Unilever has improved significantly in recent years, and so we think this deal is better late than never.”
Leaving some stock public is a good public relations move by Unilever, given the size of HUL and the number of people it employs, and will allow local investors to be part of its growth. But the set-up will make it difficult for the company to cash in on its subsidiaries and leaves it open to investor backlash.
Under the terms of the offer, Unilever will offer shareholders of the subsidiary Rs600 per share for up to 487m shares, representing 22.52% of the company.
“We understand that Unilever will finance the purchase through a mixture of cash and existing debt facilities. If Unilever had owned a 75% stake last year it would have reduce its minority charge by around €100m, and we understand the company expects the deal to be immediately earnings accreditive,” added Jones.
Unilever is now under pressure to rejuvenate earnings growth quickly to make the investment worthwhile, at a time when competitors like Procter & Gamble have divested themselves of its slower-growing edibles businesses.
But the deal appears solid, even if it comes late in the day. The offer will commence in June and will likely be completed the following month.