Unilever Ireland pursued a wrong strategy in its attempt to fully acquire the Minstrels' tea company, Lyons Irish Holdings now the right one (LIH), just over a year ago. Its stingy offer was rightly rejected. Unilever, the manufacturer of well-known products such as HB ice-cream, McDonnell soups and Colman's mustard, is now paying for that rigidity.
It is having to pay an extra 60p as a special dividend, on top of its original offer, to entice the 900 odd shareholders to accept. Had it shown some flexibility last year, it would have ended up richer. Unilever could have gained full control last year by paying about £1 million less than what it is now offering the shareholders representing 19.2 per cent of LIH. An extra 40p on top of the 323.3p offer could have clinched it. Further, its cash flow, and cash balances, would have been enhanced by around £1.3 million, without the three dividends it has since paid (or agreed to pay). Even now there is a slight hint of stinginess. Today's cash offer is 0.3p less than last year's. It could be argued that Unilever has rounded down the figure for convenience. And the odd figure only arose because that represented the same price per share that Unilever paid to Allied Domecq for its 75 per cent holding in LIH. But the counter argument that it could have rounded it up to 324p, could also be made.
That, of course, is only a minor point. Unilever has now offered a reasonable consideration. It is being recommended by the Lyons' independent directors, and should be accepted by the shareholders. It consists of 323p cash per share, plus the special dividend of 60p, and the retention of the 6p net interim dividend which has just been declared. There is also a tax credit on the interim dividend, but the Budget provisions have reduced that from 6p to around 4p (the official offer document out this week should indicate the exact tax credit). If the two other dividends which have been paid are added, then the shareholders who said no to Unilever last year are, in effect, receiving 405.4p. And that does not include any benefits from the tax credits.
This week's offer document will indicate that there is an alternative five-year loan note offer with a fixed 6 per cent coupon. As it is paid half yearly, the annual rate is, in effect, slightly more. The coupon has some attractions, particularly with the prospect of interest rates reducing over the next couple of years.
The loan note alternative is less attractive for those wishing to postpone the payment of capital gains tax following the cutting of that tax from 40 per cent to 20 per cent in last week's budget. Nevertheless, it may suit some investors, particularly the long-standing shareholders with an effective share price of 7.5p in 1974. Shareholders, of course, can make a capital gain of up to £1,000 (£2,000 for a married couple) before there is any capital gains liability but this threshold will cut to £500 (£1,000) next April.
The offer represents a 16.1 per cent increase on the market value of Lyons' shares before the issue. It also appears to represent a 26 per cent increase in income but this does not include the tax credit which varies between tax payers. The deal should also benefit Unilever. Although Unilever last year gave the impression that it could live with minority shareholders having a share quotation, such a scenario was never tenable. It has now admitted that its strategy in Ireland "would be best served having LIH as a full member of the Unilever Group".
To compulsorily acquire the outstanding shares, Unilever will need acceptances from 80 per cent of the value and 75 per cent of the numbers. It will have little trouble getting the former; the latter will be more difficult.
Full control would give Unilever total control of Lyons' £54.5 million cash mountain. This gives a return of only 4.7 per cent. The real return is somewhat higher because part of the return reflects the use of gilts which brings down the group tax charge.
Nevertheless, Unilever should have the ability to treble that return by reinvesting the funds in the business, thereby making the exercise very worth while.
