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Share pricing in Unilever buy-back

March 25, 2013

THE decision by Unilever Pakistan to de-list from the stock exchange after a buy-back of all shares held by the public, has met stiff resistance from a couple of holders of bigger chunks of ‘free-float’.

The UK parent of Unilever Pakistan, Unilever Overseas Holding Limited, which already owns 75.07 per cent of the company, said it wanted to take its stake to 100 per cent. Thereafter, it would seek (voluntary) de-listing from the three stock exchanges in Pakistan. The price offered for a share of par value of Rs50, is Rs9,700.

But the Unilever stock is one of the most expensive on the country’s stock exchanges, currently trading at around Rs10,000 per share. Ordinary shareholders have miniscule stake in the company. With 66.47 million outstanding shares, Unilever Pakistan is valued at around Rs700 billion on the exchanges, based on its latest stock price.

ACACIA Partners LP, which holds 543,000 shares, or 4.1 per cent of the stock in Unilever Pakistan, says that the company be “denied de-listing so as to allow us to remain committed investors in Pakistani companies”. Acacia Partners’ funds claim to hold stakes in a number of big companies on the Karachi Stock Exchange (KSE), with an estimated investment value of $75 million. Acacia also urged that the exchange refuse the buy-back price offered by Unilever. The minority shareholder demands two to three times the price offered by Unilever.

Apparently, 543,000 shares of an aggregate 66.47 million outstanding shares in Unilever Pakistan looks insignificant. But as the price of the stock is high, Acacia’s investment is worth a staggering Rs5.43 billion at market price.

Decidedly, for the few minority shareholders in Unilever Pakistan, the stock has been a treasure trove. Being a high growth, high profit yielding company, its directors announced cash dividends for the years 2010 and 2011 at as high as 492 and 614pc respectively.

It is understandable then, why outside shareholders should grudge Unilever’s attempt to amass total equity. But there are two big question marks. Firstly, can small shareholders, or market regulators, block the exit of a company that wishes to seek voluntary de-listing? And secondly, is the price offered by the company negotiable?

Mr Khalid Mirza, former chairman of the Securities and Exchange Commission of Pakistan (SECP) who is currently on the faculty of the Lahore University of Management Sciences, says that a company cannot be held hostage to the whims of minority shareholders if the overwhelming majority wants it to be de-listed. He, however, affirms that “minority shareholders do have the unfettered right to get the fair price for their holdings in the company”. He observes that even a single minority shareholder can approach the SECP if he thinks that he is being driven away with a price lower than the company fundamentals warrant.

KSE Managing Director Nadeem Naqvi said that Unilever’s offer of the buy-back price has been forwarded to a five-member committee, which comprises two independent KSE directors, two former members of the exchange, and the managing director of the bourse.

The committee would meet next week to ponder over the offer price. Historically, the KSE has been able to broker best price for minority shareholders in companies wishing to seek an exit.

The buy-back offer is not mandatory, but voluntary. Small shareholders, who may wish to keep their stake in the privatised Unilever, can exercise that option. But minority shareholders object that there is a great difference in the way public and private companies conduct their affairs. The public companies let in daylight, publish reports and hold shareholders’ meetings. By contrast, private companies operate in a fog of secrecy.

The protesting minority shareholder suspects that one of the reasons for Unilever to de-list is that since growth has slowed in the developed world, most major multinational corporations realise that future growth would come primarily from developing countries.

“Thus, they have become far more focused on investing in emerging markets and capturing as much of the future profit growth as possible,” Acacia alleges.

That could be true. Yet, de-listing by big corporates is starting to be a global phenomenon. A recent issue of the ‘Economist’ London revealed some startling figures. It said that the number of public companies has fallen dramatically over the past decade – by 38 per cent in the US since 1997, and 48 per cent in Britain. The number of initial public offerings (IPOs) in the US declined from an average of 311 a year in 1980-2000, to 81 a year in 2000-11.

The KSE Managing Nadeem Naqvi , agrees that globally, in the last two years, many multinational companies are de-listing from stock exchanges and going private, since the cost of debt capital has declined to low levels of around two per cent for highly rated companies. Also, he said, according to some reliable publications, US companies have accumulated around $1.3 trillion in cash on their balance sheets, which is why they do not require outside funding.

On the issue of Unilever’s voluntary de-listing, the veteran broker Haji Ghani Haji Usman admitted that there could be some psychological and sentimental impact on investors as they watch another multinational company walk away from the KSE. Yet, in a free-market economy putting up hurdles in the entry or exit almost always backfires.

Investors are still nursing the wounds of an unwise decision by regulators in 2008 to close the exit door by putting a ‘floor’ under a stock’s fall. That had quite the opposite effect of sending shares reeling down, so as to plunge the benchmark KSE-100 index to its all-time low.