Awkward Precedent

Unilever's Debt Temptation

More European companies may seek takeover protection by loading up with debt.
At Closing, April 23th
57.68 USD

Unilever CEO Paul Polman must have had one eye focused across the Atlantic when he unveiled his revamp of the consumer goods giant this week. And not just because erstwhile suitors 3G Capital, Kraft Heinz Co. and Warren Buffett will have been watching.

In an effort to appease shareholders, Polman also ripped a couple of pages from any U.S. CEO's post-crisis playbook: load more debt on the balance sheet and buy back lots of your own shares. So Unilever will lift its net debt to Ebitda ratio from 1.3 to 2 and buy back 5 billion euros ($5.3 billion) of stock.

In Europe, that counts as relatively bold. Faced with anemic economic growth since the global financial crisis, non-financial companies here have typically been reluctant to take on more debt, as the chart below shows.

Leverage Gap

U.S. companies have lifted debt levels. Europe companies haven't nearly as much

Source: Bloomberg

Stoxx 600 data adjusted for data anomaly

They're also far less likely to buy back stock: U.S. corporations repurchased more than $530 billion of stock last year. In Europe the total was a fraction of that.

Polman seems to have belatedly recognized the obvious: having a lightly geared balance sheet makes a company vulnerable to a takeover. That's especially true if the buyer is holding dollars and your stock is priced in relatively cheap euros or pounds.

Shutting the Gate

Adding debt to the balance sheet could help prevent a takeover of Unilever

Source: Bloomberg S&P 500 and Stoxx 600 shows median for non-financials

Of course there’s an argument what Polman is doing is common sense. Debt is cheap compared to equity, so Unilever's balance sheet is simply becoming more efficient. Having more debt shouldn't pose a problem for Unilever as its earnings power is considerable. People still need to buy soap and deodorant, even in a recession.

Still, this sets a rather uncomfortable precedent. Polman rebuffed Kraft Heinz's $143 billion bid in part because he's no fan of financial engineering. It would be a shame if other European companies now drew the conclusion that to remain independent they need to indulge in some financial engineering of their own. Especially if they load up on too much debt just as the current economic cycle starts to look long in the tooth. 

An excess of debt exacerbated the last crisis. There’s no reason to think the next one will be any different.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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