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When a company has more cash than uses for it, the classic corporate solution is to buy back stock. Apple recently announced the mother and father of self-investments, with plans to spend $100-billion (U.S.) on its own shares. Unilever, the Anglo-Dutch food and soap company, has found an alternative solution: buy a bigger share of its fastest growing business.
Hindustan Lever is increasing its profits at double digit rates. The Indian subsidiary, which is quoted on the Mumbai stock exchange, is Unilever's Asian flagship and Asia is where the household products group is expanding rapidly, kicking sand in the face of Procter & Gamble, its deadly competitor. Unilever wants to capture more of the cash generated by selling toothpaste and deodorants to young, middle-class Indians so the company said today it would invest €4.1-billion ($5.4-billion) to raise its stake in Hindustan Lever from 52 per cent to 75 per cent.
The offer to Hindustan Lever shareholders is causing a furor in Mumbai, not least because the parent company recently raised the royalty rate it charges its Indian subsidiary for intellectual property and central services. But it makes huge sense for the parent company shareholders. The trouble with buybacks, and Apple's is no exception, is they often coincide with a business slow-down. An exceptional return of cash to investors tends to deliver the message that either the company has run out of steam or the management has run out of ideas. Unilever has lots of spare money with net free cash flow in excess of €4-billion last year and little debt. Its last significant corporate deal was the $24-billion purchase of Bestfoods over a decade ago. But today, the best investment Unilever can make is in emerging markets, and the best target is probably its own subsidiary.
This is good for Unilever but it is also a warning to businesses in the flagging mature markets of Europe and North America. Hindustan Lever is corporate history, part of the colonial dowry inherited from the original investment by Lever Brothers in India in the 1930s. It was nurtured for years and operated for a long time as an almost independent fiefdom in a sprawling multinational empire. Its investment in India's emerging consumer economy began to boom just as the financial bubble collapsed in Europe and the U.S. . Small wonder that a more centralising and streamlined Unilever is now grabbing tighter hold of the old family silver in the company vaults and giving it a good shine.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.