We consider India's long-term growth potential attractive: James Allison

Interview with Head of M&A's and investor relations, Unilever

Soon after the announcement that Unilever would increase its stake in its Indian unit Hindustan Unilever Limited (HUL) to 75 per cent, James Allison, head of mergers and acquisitions and investor relations, Unilever, tells Dev Chatterjee why the company is launching a $5.4-billion offer for HUL shareholders. He also addresses speculation that the open offer is in response to the falling stock, resulting from concerns on increased royalty. Edited excerpts:

The open offer took investors by surprise, as today, the HUL stock soared 18 per cent. What are the reasons for the open offer? And, why now? Many analysts are saying the offer is being made to support the falling HUL stock.

The long-term growth potential of emerging markets is central to our strategy — already, about 57 per cent of our turnover comes from emerging markets. With this offer, Unilever aims to increase its investment in an attractive country within this region. This represents another step in Unilever’s strategy to invest in emerging markets and increase its exposure to countries that offer great long-term, structural growth potential, through population growth and rising per capita income. We are making the offer today, after both companies have announced results and all the information is available to our shareholders.

Just six months ago, the HUL stock was trading at Rs 583, compared with Unilever’s offer of Rs 600 a share. Why do you think its a fair offer for shareholders?

The offer is being made at a premium of 26 per cent to the one-month average price, 25 per cent to the average price last week, and 29.5 per cent over the mandatory floor price required under Indian regulations. We think this is a fair price.

Why is Unilever spending so much cash? What kind of a growth story does Unilever see in India?
As we’ve said earlier, India is a key country for Unilever, and we consider its long-term growth potential to be attractive.

Would Unilever aim to go private once the stake rises to 75 per cent? The markets are betting the stock price would exceed Rs 1,000.

I cannot comment on what the market is speculating. There is no plan to de-list HUL. HUL is a flagship company in India, and we believe keeping it listed is attractive. It attracts hundreds of thousands of retail shareholders, who are important to our business.

Indian institutions such as LIC and foreign investors such as Aberdeen are saying they would not sell their shares at this price and the offer is being made in response to the share price collapse post higher royalties to 3.15 per cent by 2018. What do you think?
This is our final offer. We will not exceed Rs 600 a share.

Minority shareholders, too, aren’t happy. They are saying after tax, the offer is not good enough.
Again, this is our only and final offer.

Early this year, you had announced a rise in royalty. This resulted in many large HUL investors exiting the scrip. Why was higher royalty not appreciated by investors?
The increase in royalties was a fair adjustment to reflect all the benefits HUL got from the parent company, the costs of all the centrally-sourced activities, services such as marketing, research and development, etc, are accumulated by the parent company and shared between the local operating companies that benefit from these, mostly depending on size and portfolio. These pay back charges to parent companies. All our in-country businesses pay charges to parent companies (calculated in line with OECD guidelines, and benchmarked against the industry). The royalty arrangement had last been reviewed decades ago, and the increase recently announced was aimed at reflecting the current benefits HUL got. Some shareholders might not have been happy, but it’s a fair adjustment.

The transaction would cost about $5.4 billion. How would Unilever fund this?
We would use our existing cash resources. We are not disclosing details yet.

Would you adopt a similar strategy in other emerging markets? In most of them, Unilever’s stake is quite high.
We have no comment on other listed subsidiaries.