Friday, 28 June 2013

HUL Open Offer - A Quick Look

Hindustan Unilever is the giant in the Indian FMCG sector which has shown remarkable growth and has given its investors good returns in the past. On 21 Jun 2013 the parent company Unilever issued a voluntary open offer at Rs.600/- per share with an additional dividend of Rs.6 per share  in HUL to increase its stake in the Indian arm. Presently Unilever has 52.48% stake in HUL and with the open offer it aims to increase its stake to 75%.

In the wake of this recent development we would like to analyse the impact of this open offer on the company and what is good for the investors.

The fact that Unilever has issued the open offer should tell the investor that the parent company believes and is certain enough about the growth of its Indian arm that it has decided to increase stake in its own business. Long term investors should see this as indication that the company is sure of further growth and value appreciation in future.

Open Offer - To Sell or Not To Sell :

Investors having HUL as a part of their portfolio have the option of tendering their shares in the open offer at a very good price. The company has given a very good exit route at a very good price premium for existing investors in our present dull economic situation.

On the other hand, deciding to hold on will mean that as an investor you will now be holding the shares to enjoy further price appreciation in the years to come as the company grows further. All the while enjoying dividends that may be declared periodically by the company.

In case you decide to take advantage of the open offer, then you should take note that tendering your shares in the open offer will attract long term capital gains tax on the transaction.

 Suppose you are holding 100 shares of HUL bought at Rs.100/-. If you decide to tender the shares in the open offer for the price of Rs.600 you attract 10-20% (depending on cost indexation) long term capital gains tax on the transaction value. The total tax liability in this case will be :
Selling Value - Buying Value (600-100) * 10% = Rs. 5000/- (assuming 10% tax without cost indexation)

The Middle Way out :

Investors can however follow the below mentioned process to some advantage after due consultation with their financial advisers :

Say, investor is holding 100 shares of HUL for long term (more than 1 year).

  • Trade your shares in the market to avoid capital gains tax. You will get an amount of CMP*100. There will be a STT and service charges as with any other trade.
  • Buy same number of shares from the market and tender them in open offer.

Say you are holding 100 shares of HUL. You first sell them at CMP say 588 in the market and repurchase them at the same price. You lose STT and service charges for the transactions which are minimal. Then you sell these 100 shares in the open offer at Rs.600/- per share which will now fetch you a short term gain of Rs.1200/- as against any long term gains if you had tendered the initial 100 shares directly in the open offer. Hence, you avoid paying any long term capital gains tax for tendering in the open offer.
By following the above route you get the following :

  • Net tax liability will be minimal.
  • Open offer tax liability gets bypassed
  • You give short term capital gains tax, but are saved from paying long-term capital gains tax.
  • As dividends are not taxed, this will get added to the net gain from the transaction.

All in all it is better to give STT and short term tax which are minimal by transacting in this way than tendering in open offer directly and subjecting yourself to long-term capital gains tax.