Unilever’s plan to delist one of its Pakistan subsidiaries from the local stock exchanges appears to have hit a snag: its minority shareholders appear to be refusing to sell their shares at the proposed price, and some do not want to sell their shares at all.
The global food and consumer goods giant Unilever owns just over 75% of Unilever Pakistan, and on November 28 last year announced that it planned to buy back the remaining shares that are currently listed on the Karachi Stock Exchange as well as the other two exchanges in the country. But institutional investors with substantial minority stakes in Unilever Pakistan have balked at the Rs9,700-per-share buyback price, as well as the prospect of losing the opportunity to remain invested in one of Pakistan’s largest and best-run consumer goods companies.
One of the most outspoken shareholders is the New York-based hedge fund Acacia Partners, which managed about $4 billion in assets, including $75 million worth of investments in Pakistan. Acacia owns about 4.1% of Unilever Pakistan and sent strongly-worded letters to all three stock exchanges in the country.
“We believe the proposed de-listing of the company would, if approved, be a great tragedy for minority investors, the stock exchanges of Pakistan and the country overall,” wrote the fund in its letters.
Foreign investors in particular are perturbed at the prospect of losing the ability to invest in one of the fastest-growing blue-chip consumer goods companies in Pakistan.
“Food and consumer goods companies represent only about 6% of the market capitalisation of the [benchmark] KSE-100 index, far lower than the 18% or so that it is in India and Southeast Asia. If Unilever Pakistan gets delisted, that number goes down further to around 4%,” said Puneet Saraogi, a director at the Singapore-headquartered Arisaig Partners, an asset management company with a 5.8% stake in Unilever Pakistan, the single largest minority shareholding.
Arisaig Partners would be particularly badly affected by this move: the company manages about $4.3 billion through three mutual funds which are focused exclusively on consumer-related investments. It has approximately $180 million invested in Pakistani consumer goods companies, and its largest holding is in Unilever Pakistan.
The major problem that foreign investors have highlighted is the fact that the current rules for delisting appear to favour the seller. A 75% shareholding gives the sponsor the right to get board approval, as well as general shareholders approval, for the delisting. The only check on the sponsor’s decision is the requirement to seek approval from the stock exchange for its buyback price and delisting request.
To their credit, the KSE management realise that the rules could use improvement. “Our rules are designed mainly for defaulting companies, not financially viable ones doing a voluntary delisting,” said KSE deputy managing director Haroon Askari. “We are now wiser for this event and will be changing the rules in the future though we have to abide by the current rules for this transaction.”
He added: “We are sympathetic to the interests of the minority shareholders. Having said that, a listing should not become a prison either. We cannot have rules that effectively forbid delisting, otherwise people will be unwilling to list in the first place.”
For now, the KSE management plans to bring forth the concerns of the minority shareholders in its discussions with Unilever, including the inclination of many to not sell at all. It remains unclear how Unilever will respond to those concerns. The company’s management did not respond in time to requests for comment by The Express Tribune.
The desire of foreign investors to hold on to the company’s stock appears very understandable. Unilever Pakistan stock has soared 81.5% during calendar year 2012, vastly outperforming the benchmark KSE-100 index’s rise of 49% during that year. The stock’s rise has been largely based on its stellar financial performance. During the first three quarters of 2012, while the company’s revenues increased by 15% to Rs43.9 billion, its profits increased by a staggering 49%, on the back of improved margins.
And it is that improvement in margins that has investors interested: “Unilever Pakistan currently has an operating margin of around 13.2%, which we feel will eventually reach 17% or 18% in the coming years,” said Saraogi.
As a result, there is almost universal consensus that Unilever Pakistan has been grossly underpriced. “Given its growth prospects, the company should offer a higher earnings multiple, and the price should be at least Rs15,000 per share, if not higher,” said Shahid Aziz Siddiqi, the chairman of State Life Insurance Corporation, the country’s largest life insurer, which has about a 2.1% share in Unilever Pakistan.
Published in The Express Tribune, February 7th, 2013.
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