Pressure is on Unilever to meet investor expectations
Anglo-Dutch group moves closer to revealing options after strategic review
Unilever is considering returning cash to shareholders, making medium-sized acquisitions and more aggressive cost cuts as part of a sweeping review, the results of which it will announce next month.
The review follows what Paul Polman, Unilever chief executive, has privately described as the “near-death” experience of Kraft Heinz’s $143bn takeover bid, which could have seen the Anglo-Dutch company swallowed up by the US group, backed by private equity firm 3G Capital and Warren Buffett.
Unilever had a quick reprieve — the most feared consolidator in the food industry withdrew its offer within 48 hours. But Graeme Pitkethly, Unilever’s finance director, told an industry conference a week after the approach: “This has certainly been a trigger moment for Unilever. And we will not waste it.”
Division heads at the consumer goods group’s businesses, which range from Hellmann’s mayonnaise and Magnum ice cream to Sunsilk shampoo and Axe deodorants, have been told to review their operations with the aim of boosting shareholder returns.
Unilever’s share price now sits above the £39.50 a share proposed by Kraft Heinz, adding to the pressure on Mr Polman to satisfy investor expectations.
Mr Polman has been vocal in emphasising that companies should be run for long-term returns and with more than investors in mind. But, according to one large shareholder supportive of Unilever, he has recognised that “the pendulum needs to swing a little bit back to shareholder returns”.
However, the radical step of demerging all its foods operations — which include Lipton tea and Knorr stock cubes and account for 43 per cent of sales — from its home and personal care business is unlikely, according to two people close to the company.
Unilever declined to comment on the review, but in the past it has argued that it needs both sides of its business to give it critical mass in emerging markets, which account for 58 per cent of revenues.
Nevertheless, it is accelerating efforts to dispose of its Flora margarine division and some analysts say that Kraft Heinz could be a potential buyer. Unilever’s spreads business has high operating profit margins of 20 per cent and could fetch up to €7bn, according to analysts at RBC Capital Markets.
Unilever has identified two key areas for reform — its low debt levels and the need for deeper cost cuts in low-growth businesses to boost operating profit margins.
Though a point of strength, Unilever’s low debt left it exposed to Kraft Heinz. The US company planned to raise debt against Unilever’s strong balance sheet to help fund its purchase.
One senior industry executive says: “It’s ironic because it’s like saying someone is too healthy. The fact is that if you have a strong balance sheet today, that makes you vulnerable to 3G. So you need to make yourself a bit sick — but not too much.”
Unilever is contemplating raising its net debt to 2.5 or 3 times earnings before interest, tax and depreciation, from 1 times now, according to the two people close to the group.
At 2.5 times, Unilever would have €29bn to spend by 2020, according to Andrew Wood, analyst at Bernstein.
Some of this is likely to be returned to shareholders. In the past, Mr Polman has dismissed share buybacks as not making “any sense” but Unilever is now “open to ideas”, says one investor.
“If they wanted to spice up the returns, they could do a special dividend in a year or two and announce it now,” says another.
Unilever is also considering larger-scale acquisitions than the bolt-ons it has made in recent years. It has spent €4bn on acquiring companies such as Dollar Shave Club and Dermalogica skincare — but these are small in the context of Unilever’s €53bn sales last year, none of which added more than 3 per cent to overall revenues, estimates Eva Quiroga-Thiele, analyst at Deutsche Bank.
Reckitt Benckiser, which is buying baby milk maker Mead Johnson for $18bn could opt to sell its home care business, which Mr Wood estimates is worth between £6bn and £8bn and would be a good fit for Unilever.
–Unilever has already identified €1bn of savings through a three-year cost-cutting programme introduced last year.
Mr Pitkethly, who is seen by some analysts as the driving force behind the plan, is thought to be pushing for deeper cuts in slow-growth food businesses.
The cuts could boost operating profit margins by more than the recently promised 0.8 percentage points increase, though Unilever is sensitive to the need to reinvest in its brands.
Unilever is also examining a simplification of its dual listing in London and Amsterdam, a structure that causes confusion especially for US investors.
“This is a company that’s never had any external pressure. So they are taking it seriously,” says another large investor. “Certainly, we expect something meaningful when we get to early April and they tell us the results of their review.”