HUL open offer today: Don't surrender shares, sell direct

P.H. Ravi Kumar, Managing Director of Money Matters Financial Services, is a Hindustan Unilever shareholder who has no intention of responding to Unilever Plc's open offer. "I don't usually sell my shares as the companies I have invested have been a good dividend play," he says.

Unilever PLC's $5.4 billion open offer to increase its stake to 75% in its Indian subsidiary opens on Friday (June 21) and will close on July 4. Unilever will be buying HUL shares at Rs 600 per share , up 1.15 per cent from Thursday's (June 20) close of Rs 593.15 per share.

But there are many like Ravi Kumar who would be disinclined to sell, indeed to respond to open offers in general. They have been enjoying good dividend yields for a number of years from well performing MNCs and state-run companies. In HUL's case, in particular, one more reasons investors may not sell is that the HUL stock has been performing well in the last two years, after nearly a decade of unimpressive movement. In six of the years between March 2002 and March 2011, the HUL stock underperformed the BSE Sensex. But in the last two years, the HUL stock - up 109 per cent between March 31, 2011 and June 20, 2013 - has not only beaten its Indian peers but has been one of the best performing stock across the globe.

Indeed, for long-term investors who want to sell at all, it would be better to sell directly in the market rather than surrendering shares in the open offer. They would save on tax. If they surrender their shares in the open offer they will have to pay 10 per cent tax on the gains generated - the difference between the share's purchase price and surrender price. For instance if an investor had bought HUL shares at Rs 200 per share and surrenders it on Friday for Rs 600 as the open offer provides, he will have to pay tax of Rs 40 per share. If he sells in the secondary market tax will be nil, as there is no tax liability on the investor on shares sold after being held for over one year.

Secondly even if someone wants to surrender all his shares, it is highly unlikely they would be accepted as Unilever is only buying 22.52 per cent of the 47.5 per cent stake available in open market.

Actually it  might be a good idea for investors to sell the HUL stake at its current price purely because the stock looks expensive. According to Axis Capital, the HUL stock on financial year 2013/14 earnings is trading at a price to earnings ratio (P/E) of 37, and a price to book ratio (P/BV) of over 45. Ravi Kumar ought to change his mind.