Nestle’s royalty rebuke is a sign of the times
The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to avoid an echo in paragraph one.
By Shritama Bose
MUMBAI, May 20 (Reuters Breakingviews) -Tapping the rewards of an India listing is no easy feat for global multinational companies, as Swiss food and beverages giant Nestlé NESN.S found out on Friday. The incident is a warning to others queuing up to channel rich equity valuations in the emerging market.
Shareholders in the $280 billion company's Indian unit rejected a proposal for Nestle India NEST.NS to raise the royalty fee paid to its foreign parent: some 57% of votes cast went against the plan to increase the annual payment to 5.25% of net sales from the current 4.5%.
It is common for listed subsidiaries to pay for the use of brands and technologies owned and developed by their parent. Nestle and its affiliates own 63% of $28 billion Nestle India and, as related parties, were not eligible to participate in the shareholder decision.
Yet these fees are contentious, and will only grow more so. Engineering firm SKF India SKFB.NS faced resistance on raising royalties in 2020 and, around the same time, officials in New Delhi asked automakers including Maruti Suzuki MRTI.NS to reduce payments. For its part, the government wants companies to invest more in local research and development.
What's more, Nestle was trying to claim a higher cut from its Indian unit than other foreign companies take from theirs. Unilever ULVR.L agreed to collect 3.45% of Hindustan Unilever'sHLL.NS turnover last year, for example.
No wonder that assessments for the company from McKinsey and KPMG suggesting Nestle India could pay more went ignored. InGovern Research Services, a proxy advisory group, noted Nestle India failed to disclose what additional benefits it expects in return for a higher payout. Such payments cut into the dividends companies can pay out to local shareholders too.
Other foreign companies will take note. South Korea's Hyundai Motor is preparing for a $3 billion initial public offering in Mumbai later this year. It will capture a premium valuation; Nestle India trades at 66 times one-year forward earnings estimates, more than three times the multiple of its Swiss parent. Other gains will be harder to bank.
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CONTEXT NEWS
Minority shareholders of Nestle India on May 17 rejected a resolution to raise royalty payments paid to the company’s Swiss parent.
Some 57% of votes cast rejected the proposal to increase annual fees to 5.25% of net sales, up from the current rate of 4.5%. Parent Nestle and its affiliates did not participate in the vote.
Consulting firm McKinsey estimates that intellectual property rights granted to Nestle India under general licence agreements with its parent offered benefits ranging between 5.9% and 7.7% of net sales. KPMG India in its fairness opinion to the India unit recommended that an arm's length royalty rate between 7.2% and 10.8% of sales.
UK’s Legal & General Investment Management and Nordea Asset Management both opposed the fee increase, India’s Mint newspaper reported on May 18, citing filings.
Editing by Una Galani and Aditya Sriwatsav
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