BREAKINGVIEWS - Unilever defies buyback vigilantes

Wed May 1, 2013 5:36am IST

A salesman takes a bottle of Hindustan Unilever Limited (HUL) Dove shampoo from a shelf at a shop in Mumbai April 30, 2013. REUTERS/Danish Siddiqui

A salesman takes a bottle of Hindustan Unilever Limited (HUL) Dove shampoo from a shelf at a shop in Mumbai April 30, 2013.

Credit: Reuters/Danish Siddiqui

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Chris Hughes

LONDON, April 30 (Reuters Breakingviews) - Unilever (ULVR.L) (UNc.AS) is breaking some of the basic rules of corporate finance. Investors, being keen on financial logic, aren't impressed.

The Anglo-Dutch consumer goods giant is offering to pay $5.4 billion for a 22 percent stake in Hindustan Unilever (HLL.NS), lifting its holding in its Indian subsidiary to 75 percent. The first rule violation is to offer a premium for additional shares in a majority-owned business. But Unilever had no real choice, since Indian stock market rules mandate a minimum price in such situations.

The high price exacerbates the second violation - buying expensive shares in another company rather than buying back its own cheaper stock. Unilever trades on a forward price-earnings multiple of 20. Its bid for Hindustan Unilever values the stock at 34 times forecast earnings.

There's more. Here is a multi-billion dollar transaction with no synergies. And the deal isn't even a route to 100 percent ownership. Unilever wants to keep the subsidiary's listing, to protect the profile that goes with being one of the top Indian blue chips.

Unilever's market capitalisation is $127 billion. It could probably spend only about $4.7 billion to buy back and retire 110 million shares without hurting its credit rating. After taking the cost of debt into account, the financial engineering would boost per share earnings more than the Hindustan Unilever transaction.

For Unilever, the difference is small - added accretion of maybe a percentage point or so. But corporate managers have previously danced to the tune of share buyback vigilantes, who have no patience with any amount of financial inefficiency.

Common sense is less precise but more helpful. Unilever has no better way to buy structural growth in emerging markets. Sure, in theory Unilever shareholders could buy that growth themselves by using the proceeds of a buyback to purchase Hindustan. But they would not get the closer ties and goodwill created in this important market. Those synergies are probably worth the $1 billion premium. Let common sense prevail.

CONTEXT NEWS

- Unilever has launched an offer for shares in Hindustan Unilever, the consumer group's listed Indian subsidiary, with a view to raising its stake from 52.48 percent to 75 percent.

- The offer is 600 rupees per share, a premium of approximately 29.5 percent over the mandatory floor price required under Indian regulations, 26 percent to average share price over the last month, Unilever said. If fully subscribed, it will cost 292 bln rupees.

- Hindustan Unilever distributes brands includes Lux, Lifebuoy, Pond's, Vaseline, Lakmé, Dove, Sunsilk, Brooke Bond, and Knorr.

- For previous columns by the author, Reuters customers can click on <HUGHES/>

(Editing by Edward Hadas and David Evans)

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