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Unilever offers $5.4 billion to raise stake in Indian unit

A pedestrian walks past the Hindustan Unilever Limited (HUL) headquarters in Mumbai April 29, 2013. REUTERS/Danish Siddiqui
A pedestrian walks past the Hindustan Unilever Limited (HUL) headquarters in Mumbai April 29, 2013. REUTERS/Danish Siddiqui

By Tony Munroe and Swati Pandey

MUMBAI (Reuters) - Anglo-Dutch consumer goods giant Unilever Plc offered to pay as much as $5.4 billion to raise its stake in its Indian unit, banking on fast-growing spending power in Asia's third-largest economy.

The offer to lift its share to as much as three-quarters of Hindustan Unilever Ltd, India's largest consumer goods maker, is the latest big corporate bet on long-term consumer demand in India despite economic growth at a decade low. It also reflects Unilever's focus on emerging markets amid weakness in the United States and Europe.

"This represents a further step in Unilever's strategy to invest in emerging markets and offers a liquidity opportunity at what we believe to be an attractive premium for existing shareholders," Unilever's chief executive, Paul Polman, said in a statement.

Unilever said it would buy an additional stake of up to 22.52 percent in Hindustan Unilever, of which it already owns just over half, in what would be the most valuable such offer in India.

The bid at 600 rupees per share - a 20.6 percent premium to Monday's closing price - sent shares in Hindustan Unilever surging as much as 20 percent to an all-time high early on Tuesday.

Several market watchers said investors might be unwilling to part with their shares at the offer price, which could force Unilever to settle for a smaller stake or raise its offer price.

"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.

On Monday, Hindustan Unilever beat expectations with a 15 percent increase in March quarter earnings.

The offer, payable in cash, is expected to begin in June. In a similar deal in November, UK-based GlaxoSmithKline Plc offered to buy a further 31.8 percent stake in its Indian consumer products business for about $940 million. That offer ended up lifting the parent company's stake to 72.5 percent, just shy of its 75 percent 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 sluggish as companies worry about bureaucratic red tape and uncertain regulation in India.

Still, several recent deals point to robust corporate interest in long-term spending growth in India.

Last week, Abu Dhabi-based Etihad Airways struck a deal to pay $379 million for a 24 percent stake in India's Jet Airways, while Swedish clothing chain Hennes & Mauritz said it would spend about $130 million to open an initial 50 stores in India.

In November, UK-based Diageo, the world's biggest spirits maker, agreed to buy a majority stake in United Spirits Ltd, the dominant Indian player, for $2.1 billion. Automakers, meanwhile, are investing to add plant capacity despite a decline in car sales in the last fiscal year.

"It makes a lot of sense to increase stake if the company is serious about staying here for long term," said G. Chokkalingam, chief investment officer of Centrum Wealth Managers, which bought a small stake in Hindustan Unilever after the company reported results on Monday.

"In the long term, we expect there will be more incentive for the parent company to share technology to the Indian unit, introduce more brands here and raise market share," he said.

Last week, Unilever, which makes products including detergent, soap, margarine and ice cream, posted weaker-than-expected first-quarter sales growth of 4.9 percent for the three months to March 31. Its results were bolstered by 10.4 percent growth in emerging markets, which account for 57 percent of turnover.

Numerous global companies have Indian-listed subsidiaries, the legacy of earlier ownership caps.

Two investment bankers who declined to be identified said they expected more such activity over the near to medium term, especially in consumption driven sectors.

Indian law requires a minimum public shareholding of 25 percent for listed companies. While many global companies have considered delisting their local units, some have been deterred by the high cost of buying out minority shareholders.

HSBC is the manager of the Unilever offer.

The stock was last trading at 577.55 rupees, up 16 percent.

($1 = 54.2600 rupees)

(Additional reporting by Kaustubh Kulkarni, Sumeet Chatterjee, Abhishek Vishnoi and Nandita Bose; Editing by Chris Gallagher)

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