* Bets on Indian consumer demand with Hindustan stake buy
* Hindustan Unilever shares surge to near offer price
* Many investors may opt not to sell
By Nandita Bose and Kate Holton
MUMBAI/LONDON, April 30 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
percent from 52 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 percent
of its turnover, have contributed double-digit growth in recent
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 600 rupees per share - 20.6 percent over Monday's
closing price - sent shares in Hindustan Unilever surging as
much as 20 percent 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 Plc.
Its 2012 return on equity was 87 percent, well ahead of an
industry mean of 66.5 percent.
"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, whose brands include Rin bar
soap and Lakme skincare products, beat expectations with a 15
percent 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.
Shares in Unilever were down 0.9 percent at 1315 GMT,
underperforming a nearly flat FTSE 100 Index, although analysts
and investors welcomed the deal.
"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 percent 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 Plc
offered to buy a further 31.8 percent in its Indian consumer
products business for about $940 million. That offer
ended up lifting the parent'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 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 percent
for the three months to March 31. Growth in emerging markets was
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 percent.
James Allison, Unilever's head of Investor Relations and
M&A, told India's CNBC TV 18 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 percent, so
be it," he said. HSBC is the manager of the Unilever offer.