GSK Launches book to sell HUL Stake, What Does it mean for HUL shareholders?

GSK PLC launched book to sell 5.7% stake in Hindustan Unilever today. The large trade is likely to take place on the exchanges in the price range of 1850-1950 per share (discount of 3-8% from CMP).

HUL had issued shares in the ratio 4.39:1 to all GSK Consumer shareholders as part of deal to acquire Horlicks & Boost from the latter in December 2018.

The important part about this trade is that GSK is looking to sell the entire stake worth $3.5 Billion (27000 Crore) in one large trade instead of part sale. That removes future supply overhang on the stock. 

I’ve learnt from sources that the buyers are likely to be institutions, both, foreign and domestic. This eliminates the possibility of HUL’s parent Unilever PLC buying the stake from GSK. Remember, as part of dilution due to the merger, Unilever’s stake in HUL reduced to 61.9% from 67.2%. 

As a result of Unilever’s stake dilution, the free float (public shareholding) of Hindustan Unilever increased from 32.8% to 38.1%, thereby resulting in an increased weightage on the Nifty and other passive indices like MSCI etc. With the elimination of Unilever buying this stake, the fear of reduction of this increased free float goes away.

GSK’s impending sale was among the many reasons that kept a lid on HUL’s stock price over the last one month where it corrected 23% from record high of 2614 on April 8^th to 2010 today. The other reasons of underperformance were; weakness in business due to Covid-19, expensive valuations of 64X FY21e and some profit booking after a stellar 54% run in last 12 months and 180% in last 3 years.

With GSK’s supply overhang out of the way, street is likely to focus on the key upside triggers for the stock going forward. The management sounded cautiously optimistic on the way forward, in its post Q4 earnings call and recovery post COVID would be a key trigger post COVID-19. History has taught that HUL has been the company that bounces back the fastest after any disruption. We saw that with great launches in the Naturals space after Patanjali’s disruption and strong supply systems after demonetization and GST. 

The other important trigger that the street will keep a keen eye on, will be the growth opportunities that Horlicks & Boost bring to HUL. In an interview with me in Jan 2020, Sudhir Sitapati (ED, Foods & Refreshment at HUL) did say, Horlicks is a dream acquisition due to its low category penetration and high gross margins. The company expects 1000 bps synergy benefits from this deal. Brokerages ascribe an EPS accretion of anywhere between 5-10% on account of this.

HUL has shown remarkable growth via acquisitions in the past like Pears, Kwality, Kissan, Knorr, Lipton and recent ones like Indulekha & Adityaa Milk. HUL acquired Indulekha in 2015 for 330 Cr and the brand is worth over 2000 Cr as of 2019. The final trigger would be how Hindustan Unilever carries itself into newer categories by Bolt-On acquisitions into newer categories like V-Wash and some more opportunities that may arise due to COVID related disruptions.

For all these triggers, the stock isn’t particularly cheap at 57-58X FY21e; but some would say it’s better than at 64-65X it was trading at just one month ago. Personally, however, I would love to hear HUL's mascot Lalitaji's opinion on this. Wonder if she'd say "HUL ki khareedari mein hi samajhdari hai" or not?