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(Update) Fund managers hope Unilever (ULVR) will realise value within its business, following Kraft Heinz's (KHC.O) failed $143 billion bid.
On Wednesday Unilever's shares jumped close to the record high reached last Friday, after the consumer goods giant pledged a swift review of its business following its rejection of a bid from Kraft Heinz.
Shares in the Anglo-Dutch ice-cream-to-deodorant group climbed 5.5% or £1.96 to £37.83 on Wednesday afternoon, recouping virtually all of their declines over the preceding days after it issued a statement promising a ‘comprehensive review’ for the benefit of shareholders. Shares closed at £37.97 last Friday after Kraft’s bid attempt was confirmed. The consumer goods group finished the week down from Wednesday's highs, at £37.64 per share.
‘Unilever is conducting a comprehensive review of options available to accelerate delivery of value for the benefit of our shareholders. The events of the last week have highlighted the need to capture more quickly the value we see in Unilever,’ it said
‘We expect the review to be completed by early April, after which we will communicate further,’ it added.
The speedy inquiry raises the possibility of a disposal or spin-off of its food business which is lower margin business than personal care products, where it could boost growth with an acquisition.
Unilever has many supportive long-term shareholders, such as fund manager Nick Train, but this week its management team led by chief executive Paul Polman has been under pressure to reward that loyalty and show it can deliver more value for investors’ money locked in its many brands.
‘It could prompt it to split food and household products division to realise the market value,’ he said.
Alternatively, Unilever could explore a different route and look at potential acquisitions, he added.
Roberts bought into Unilever a few weeks ago after spotting a valuation opportunity. It now represents a 1.5% position in the Fidelity Global Dividend fund.
Steve Clayton, manager of the HL Select UK Shares fund, agrees that the Kraft bid was not high enough for Unilever's ‘exceptional business’, as its well-loved brands translate into high margins and strong cashflows.
Unilever is one of Clayton’s biggest positions at 4.3% of the portfolio.
He doesn't agree with some commentators who argue that Unilever, along with the broader consumer goods sector, looks overvalued.
‘This completely overlooks the long-term value that the company is capable of creating,’ he said.
‘Kraft Heinz’s approach underlines the long-term value that successfully managed consumer brands can create. These businesses are defensive; people do not stop buying shower gel, pasta sauces, stock cubes or mayonnaise just because GDP came in a tad below consensus.’
In Clayton's view, Kraft’s bid has created a new benchmark to value consumer goods businesses.
'They also now know that there is a large player looking to bulk up,' he added.
This means consumer goods valuations should be supported, given Kraft is on the lookout for takeover targets.
He expects the strategic review could result in parts of Unilever being listed or sold.
Cash-rich US businesses could be sitting on even more cash if president Donald Trump's policies are introduced which would encourage the repatriation of foreign profits. If this happens, Stick expects more UK and European companies will become bid targets.
However, he suspects there will be limited scope for UK takeovers because of political intervention.
‘[Prime minister] Theresa May does not want the crown jewels being sold,’ he said, adding that there was a ‘lot of policy in the background’ which scuppered Pfizer’s hostile pursuit of AstraZeneca (AZN) in 2014.
‘Politicians cannot stop takeovers but they can make it harder.’
Stick believes that politics will not stop US companies trying to acquire UK businesses this year and highlights ITV (ITV) as a ‘potential bid target’.
‘We are circumspect about [ITV’s] position,’ he said. ‘It will be interesting to see if [a takeover] happens; we would not be an advocate of that.’