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Should You Tender Shares in Unilever’s Offer For HUL?

UnileverHindustan Unilever Limited’s owner, the global Unilever, is offering Rs. 600 per share to increase their stake from 52% to 75%.

Effectively they are buying 22.5% of the remaining 47.5% of the company. If all investors were to offer their shares to Unilever, they would buy about half of the offered shares. (Technically they would buy about 47 shares for every hundred offered, but you can assume that some people won’t offer their shares, or won’t know about this offer etc.)

Note: the process is like this:

  • Check out the offer document
  • If you have shares in demat mode, you need to give your demat provider an “offline transfer instruction” which usually involves a three-copy form to be filled. Details are on page 41 of the open offer (i.e. where it has to be transferred).
  • Don’t worry: this is an escrow account where the shares will be held and then if they don’t buy any shares, they will transfer it back to you.
  • Send a photocopy of the transfer form , along with a filled application form (if you haven’t received one, you can send it in plain paper)
  • For physical shares the procedure is in page 40.
  • Do this between June 21 and July 4, 2013.

Given this: should you offer your shares?

I’m assuming you WANT to sell your shares. The fact remains that HUL is a good company, and only 25% of the shares will be left with the public so they will command a “scarcity premium”.

None of the funds are coming to the company, so there will be no effect on company performance. The greater ownership of HUL may make Unilever pay greater royalties to the parent, which means the profits in India will be lower correspondingly.

With earnings of Rs. 17.5 the price of Rs. 600 indicates a P/E of about 34 at this price. The stock isn’t hugely overvalued compared to its peers like Dabur, Godrej Consumer products etc. which command a similar P/E. However, the stock hasn’t grown that much, with profit growth of just 15%.

But the decision of selling is complicated. There’s a good monsoon, which is usually good for FMCG sales. The company has no debt. The scale of FMCG is phenomenal and if their price increases stick, they’ll make fabulous numbers. Yet, this stock is not as aggressive as the younger players, and there’s a good chance the falling overall growth period will hit their fortunes. Making this decision for you isn’t easy, so I won’t try. If you still don’t want to sell your shares, stop right here.

The Tax Implication of Selling versus Tendering

If you had a 100 shares, and you offered them all, you can expect about 50 to be bought back at Rs. 600. Or, you could sell your shares at Rs. 592 in the open market.

Post July 4, the stock will change price. We don’t know what this price will be, so that price is what your remaining shares can be sold at (if you’ve tendered)

The answer to “should you offer” has a tax issue. Remember that a tender offer is considered an “off-market” sale and thus, long term capital gains tax will apply (if bought less than a year ago, the income is added to your regular income). The current rate is 10% of absolute (unindexed) gains or 20% of indexed gains.

Read: How to Calculate Long Term Capital Gains Tax

That means, if you tender your shares in the open offer, you will have to pay tax on the gains. If you, instead, sell the stocks in the stock market your long term capital gains are zero. (In case the shares were bought *less* than a year ago, they are taxed at about 10% of the gains)

So assume you bought 500 shares for Rs. 100 long long back.

Tender Offer: If you tender the shares, you will be able to sell say 250 shares to the company at Rs. 600 each. Your gain (unindexed) is Rs. 500 per share, of which the tax is 10% so about Rs. 50. You make a post-tax profit of Rs. 450 per share.

Open Market: Sell in the market today at Rs. 592, and you’ll make a clean profit of Rs. 492 per share as profit, on which you pay no tax.

It’s a no-brainer really. If you bought over a year back, and want to sell, sell the share on the stock exchange today. Additionally you can sell more shares than you want, or sell them all.

Caveat: There may be an odd case where one has bought shares really short term and the tax angle allows you a better deal to offer. Or, if you are an FII who doesn’t pay capital gains tax even on off-market transactions, the Rs. 600 is a better deal (FIIs own nearly half of the non-promoter stock). Or a mutual fund, a pension fund or an insurance company (who don’t pay taxes).

But if you’re an individual or a company, the tax angle is almost definitely such that you should sell on the exchange instead of giving shares in the tender offer.

DIsclosure: Family used to own some shares, we sold them recently in the open market.

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