Unilever Reviewing Options for Change After Kraft Bid Fails

Updated on
  • Anglo-Dutch consumer-products giant raises profit forecast
  • Shares surge, returning to levels after Kraft announced bid

Unilever Focuses on Returns in Strategic Review

Unilever, fresh from fending off a $143 billion takeover proposal by Kraft Heinz Co., vowed to boost shareholder returns with a strategic review that might point to a breakup of the Anglo-Dutch consumer-goods giant.

Unilever shares surged 5.7 percent in London, returning to the levels immediately after Kraft announced its plan on Friday, as the maker of Dove soap and Ben & Jerry’s ice cream also raised its profitability forecast.

“The events of the last week have highlighted the need to capture more quickly the value we see in Unilever,” the company said in a statement Wednesday.

While Kraft Heinz dropped its unsolicited approach only two days after it surfaced, the review shows the pressure Unilever Chief Executive Officer Paul Polman is under to boost the company’s value as he seeks to repel unwanted suitors and keep investors on his side.

A sale of the company’s spreads business is one option, according to two people familiar with its thinking, who asked to remain anonymous because the review isn’t public. That division, which includes brands like Flora, has previously been earmarked for possible disposal. Another possibility is a split of the personal-care and food businesses, or an increase in the dividend to appease investors who had hoped for a windfall from a bid, the people said.

Unilever “is probably alluding to a number of potential things, a more accelerated and aggressive cost-savings plan or spinout of some assets,” said Martin Deboo, an analyst at Jefferies in London.

Unilever shares closed up 204.5 pence at 3,791 pence in London, boosting its market value to about 113 billion pounds ($141 billion). The company said it expects the review to be completed by early April.

Unilever’s spreads unit has been a thorn in Polman’s side since he became CEO in 2009. The business has been hurt by volatile oil and dairy prices and a consumer embrace of all things natural, which has lifted butter consumption to 45-year highs, according to U.S. government data.

Despite saying he values the spreads business for cash generation that Unilever can plow into faster-growing brands, Polman has taken steps to distance himself from the troubled division. In December 2014, Unilever split it off into a stand-alone business unit, a move that analysts said was long overdue and could presage a sale.

Kraft Heinz’s approach may spur Unilever to buy back stock or step up merger-and-acquisition activity, according to Ernesto Bisagno, senior analyst at Moody’s Investors Service. A 10 billion-euro ($10.5 billion) buyback over three years would have little impact on debt ratios given that the company will generate free cash flow of about 1.5 billion euros a year over that period, he said.

Margin Improvement

“Nine of Unilever’s last 10 acquisitions are focused on faster-growth personal and home care, and that is where we see most inherent shareholder value for the long term,” said Deborah Aitken, an analyst at Bloomberg Intelligence. A sale or spinoff of the food-and-beverage portfolio also could make sense, she said.

Unilever now expects its core operating margin improvement for 2017 to be at the upper end of its previous guidance for an improvement of 40 to 80 basis points, or hundredths of a percentage point. The company had an operating margin of 15 percent last year, compared with 23 percent for Kraft Heinz, whose biggest shareholders are private-equity firm 3G Capital and billionaire Warren Buffett’s Berkshire Hathaway Inc.

Wednesday’s gain in Unilever’s shares suggests that some investors still see room for dealmaking. London-based fund manager Henderson Group Plc started buying stock Monday. Henderson’s John Bennett allocated about 1 percent of the 267 million-pound ($333 million) Henderson European Focus Trust Plc to Unilever, he said.

“We see this as an opportunity for management to examine their portfolio,” Bennett told reporters Tuesday, calling for a review like the one the company announced Wednesday.

— With assistance by Sarah Jones, Matthew Boyle, and Craig Giammona

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