Arbitrage seen in Hindustan Unilever buyback: ICICIdirect
ICICIdirect.com has come out with its report on Hindustan Unilever (HUL). The buyback acceptance ratio is expected to be in the range of 65-70 percent, hence 1 lot (500 shares) of short future is recommended for every 1500 shares bought in cash, says the research firm.
ICICIdirect.com has come out with its report on Hindustan Unilever (HUL). The buyback acceptance ratio is expected to be in the range of 65-70 percent, hence 1 lot (500 shares) of short future is recommended for every 1500 shares bought in cash, says the research firm.
Hindustan Unilever's parent company Unilever PLC has announced a share buyback offer to acquire 48,70,04,772 shares representing 22.52 percent of the total voting share capital from public shareholders of the company at a price of Rs 600/share. At the prevailing price of Rs 573, the offer price is almost at a premium of 4.7 percent. The price differential between the prevailing price and the offer price provides an arbitrage opportunity.We recommend tendering shares for buyback
The open offer announcement by Unilever at Rs 600/share has driven the stock to its lifetime high. We believe Rs 600 will act as a cap in the near term and the stock will trade at around these levels. At Rs 600, the stock would be trading at 38x its FY14E and 33.7x its FY15E earnings, which we believe is expensive considering most of the peers are trading at significant discount to HUL. We recommend investors tender their shares in the open offer.At the current price differential between prevailing prices and buyback price, one can benefit by tendering the shares to the company. Since institutions like LIC have shown reluctance in tendering their shares, the acceptance ratio is expected to remain high. If somebody tenders shares, he will gain the price differential existing between the current price and the buyback price. However, the risk persists with the unaccepted shares if the underlying falls after the buyback. Since the return seems to be higher due to higher acceptance ratio, the breakeven for the remaining unaccepted shares also gets lower. The table below displays the breakeven price for unaccepted shares at various acceptance ratios vis-à-vis existing buying price.Returns when unaccepted shares are hedged by shorting HUL future…
An investor can consider selling futures positions to hedge unaccepted shares during the buyback process. As we are expecting the buyback acceptance ratio to be in the range of 65-70 percent, hence 1 lot (500 shares) of short future is recommended for every 1500 shares bought in cash.Also Read - Buy Tata Chem around Rs 322-328; target Rs 370: ICICIdirectDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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