Analysis: Thoughts On Unilever’s Planned Rights Issue

Nairametrics| Last Wednesday, Reuters reported that Unilever Nigeria Plc revealed plans to raise a whopping N63 billion through a right issue. The company did not issue a press release to this effect on the Nigerian Stock Exchange as is required. Companies are mandated to disclose corporate actions on the website of the NSE or risk fines.

Unilever claims the capital raise will be via a right issue and will thus increase its authorised share capital to N5 billion from N3. 9 billion by creating an additional 3.9 billion shares. A shareholder vote is set for May 11, according to reports from Reuters. Unilever will also seek to convert shareholder loans to stock via this offer.

Here are a few thoughts on this proposed offer.

On the announcement

• Yet again, retail investors who did not visit Reuters may have missed out on this news
• One would expect such an announcement to be first released on the website of the NSE.
• We will be watching closely to see of the NSE will be fine Unilever for late disclosure.

On the size of the offer

• At a whopping N63 billion, Unilever is raising capital that is at least 5x its net assets and just N10 billion shy of its total assets of N72 billion.
• Unilever currently has about 3.78 billion shares in issue out of an authorised share base of 6.053 billion units.
• Out of Unilever’s N11.6 billion equity just N1.89 billion is its share capital and another N9.7 billion in retained earnings. With only N45.7 million in share premium, shareholders of this company have not raised capital in decades.
• This will probably also be the largest equity raise we will be seeing from a non-financial institution in over a decade

Potential price for the offer

• Unilever currently trades at about N33 per share. Its year high is N50 per share
• A capital raise of N63 billion at the current price of N33 could require that the company issue about 1.9 billion units.
• However, if it plans to issue the entire 3.95 billion then we could be looking at a share price of about N15.
• Unilever in our opinion is not worth more than N7 based on our valuation metric
• The current price of N33 gives it a price earnings ratio of 42x. We consider this price outrageously over valued considering that Unilever has never matched that lofty earnings multiple. It’s 5 year compounded annual growth rate is -14%.
• It currently has a PEG ratio of about 29x. Value investors prefer to invest in companies with a PEG ratio of 1x or max 2x.
• At N7 Unilever will have a price earnings multiple of 8.6x which is still expensive considering what obtains in the NSE.
• But we know, Unilever has what we like to call an FPI premium. FPI’s typically invest in stocks like Unilever and value them based on the average earnings multiple obtainable in similar emerging markets.

What do they want to use the money for?

• Information reaching us suggest the company wants to pay down some of its related party loans which are currently dollar denominated.
• According to information in its annual report, the Company obtained a loan facility of $59.7 million (N18.8billion) from Unilever Finance International AG for clearing backlog of unpaid obligations to suppliers.
• As at the end of the year, the total amount of draw-down on the facility amounts to $49.2 million (N14.98 billion). The disbursement of the loan was made in 2 tranches and repayable within one year. It is priced at an average interest rate of 6.45% plus 3 months US Libor.
• Unilever Nigeria also owes its related parties about N15.9 billion.
• We understand that the company will be converting these shareholder loans into equity, which suggest that the rights issue share price may well be above N30.
• Unilever Overseas currently owns 60% of this stock and plans to convert its related party loans into equity.

What’s in it for Unilever

• Whenever you hear deals like this, it is always important to ask what is in it for the promoters. If you figure that out then, it is easy to follow the money
• Unilever’s parent company, Unilever Overseas Holdings B.V. Holland has been trying to own at least 75% of its Nigerian subsidiary for some years now.
• In 2015, the company launched a tender offer for 75% of the company at a share price of about N45. The Parent company held about 50% of the stock at the time. Today it owns about 60%.
• It appears the deal is to push its ownership to 75% and it could achieve this if it converts its related party loans to equity whilst still taking up further equity from shareholders who do not take up their rights.
• Being a rights issue, the path to 75% might require that it scoops up more share on the floor of the NSE.

Will we buy Unilever?

• Unilever is overvalued and such is not a recommended long term buy
• However, for the short-term, this deal could provide a short-term upside for investors. The incentive for the parent company to get to N45 could provide a potential upside on the short run.
• If this holds sway, the share price could be on a bull run, albeit temporary.
• The share price fell after the announcement of this deal as investors worried about the potential dilution.