Mumbai: Anglo-Dutch consumer goods company Unilever Plc announced on Tuesday that it will increase its stake in Indian subsidiary Hindustan Unilever Ltd (HUL) to 75% from 52.28% by spending as much as 29,220 crore in a bid to sharpen its focus on India and potentially offset slowing sales in Western markets.

“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. The long heritage and great brands of Hindustan Unilever, and the significant growth potential...makes India a strategic long-term priority for the business," chief executive officer Paul Polman said in a statement on the Unilever website.

On 25 April, Unilever reported that growth in its developed markets declined in the March quarter from a year ago. However, growth remained robust in emerging markets despite continuing macroeconomic headwinds, the maker of Lux and Dove soaps, and Knorr soups said in a press statement on its website.

For fiscal 2012 (January-December), Unilever’s net profit grew 5.36% to €4.48 billion from €4.25 billion, and net sales grew 10.45% to €51.32 billion from €46.47 billion.

On 29 April, HUL said that for the full year ended 31 March, the net profit of its domestic consumer business grew 41% to 3,797 crore—the highest in the last five years. Net sales grew 16% for the full year, with 7% volume growth, to 24,167.7 crore.

Unilever’s biggest deal in 13 years prompted a stock rally, and HUL closed 17.28% higher on BSE at 583.60.

The parent will pay 600 per share, a 20.6% premium to the Monday closing price and 2.8% up on the Tuesday close.

The price is “a premium of 26% to HUL’s last one month’s average trading share price and 25% to the last one week’s average trading price on the National Stock Exchange of India Ltd", Unilever said in a press release on Tuesday morning.

The Unilever deal will be the largest Asia-Pacific cross-border inbound targeted transaction in 2013 year-to-date and the largest in the consumer products sector globally, according to Dealogic (Holdings) Plc, a research provider. It is the biggest UK cross-border acquisition since AngloAmerican Plc’s $7 billion bid for DB Investments in November 2011, Dealogic said

The deal will be funded by cash and bank facilities and Unilever has no intention of delisting the Indian unit, Unilever spokesperson Trevor Gorin said in an email.

In the past year, the HUL stock has risen 40.17%, outperforming the BSE FMCG index, which gained 37.23%, and the BSE benchmark Sensex, which rose 12.62%. The stock also outperformed peers ITC Ltd, which rose 33.94%, Nestlé India Ltd (up 6.62%), and Procter and Gamble Hygiene and Health Care Ltd (up 31.88%).

To be sure, about four years ago, when Polman took charge of the company after spending close to 25 years at Procter and Gamble Co. (P&G) and four years at Nestlé SA, “the Indian unit was perceived as a laid-back company losing market share to rivals", said Abneesh Roy, associate director (institutional equities, research) at Edelweiss Securities Ltd.

On a visit to India in November, Polman told reporters in Bangalore that the company would generate three-quarters of its revenue from developing markets such as India and China by 2020 against 55% now.

Under Polman, top executives have a higher variable pay component that depends on performance and that has made the company more nimble and proactive, said Roy.

India’s consumption across most categories is much less than that of other Asian countries.

HUL has a 32% share in India’s beauty and personal care market, which is expected to grow 44% to $14.2 billion by 2017, according to data from Euromonitor Plc, said a Bloomberg report on Tuesday.

“India accounts for close to 6% of Unilever’s overall global revenues, but if we look at HUL’s contribution to the parent’s growth, then that is nearly 15-20%," said Nitin Mathur, consumer research analyst at Espírito Santo Investment Bank.

The company sees opportunity in mature segments for trading up, consumers buying better or more expensive, aspirational products due to increasing affluence. Even in emerging categories such as personal products comprising face wash, liquid body wash and deodorants, which account for 1,000 crore of HUL’s sales, there is an opportunity for exponential growth.

“Emerging categories can become 10,000-15,000 crore in the next 10-15 years," Unilever chief operating officer Harish Manwani said at the earnings press conference in Mumbai on Monday.

Unilever’s rivals could embark on a similar exercise, said Nikhil Vora, managing director of IDFC Securities Ltd, in a note. “We believe other listed FMCG names with foreign parents are likely to follow suit in the future—Nestlé India, Colgate, P&G Hygiene and Healthcare, and Agrotech Foods are the likely candidates," he wrote.

The focus on emerging markets such as India is a theme across most multinationals.

In January, GlaxoSmithKline Plc (GSK) announced it was increasing its stake in its India listed subsidiary GlaxoSmithKline Consumer Healthcare Ltd by 29.3% to 75% for $901 million.

On 9 November, Diageo Plc, the world’s largest distiller by revenue, agreed to buy a stake in Vijay Mallya’s United Spirits Ltd —the maker of Royal Challenge and McDowell’s No.1—for 11,166.5 crore.

Etihad Airways PJSC of the United Arab Emirates, on 24 April, agreed to pick up a 24% stake in Jet Airways (India) Ltd for $379 million.

“India is an attractive market and most large corporates want to invest here," said Sunil Sanghai, managing director and head (global banking) at HSBC Securities and Capital Markets (India) Pvt. Ltd. HSBC managed the GSK open offer, and is the banker on the Etihad deal and Unilever’s buy-back offer.

On Tuesday, the Sensex gained 0.6% to close at 19,504.18 points and the BSE FMCG index gained 4.65% to 6,548.52 points.

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