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Life after Kraft: Unilever reviews its options

Life after Kraft: Unilever reviews its options

by Gavin Lumsden, Michelle McGagh Feb 22, 2017 at 16:44

(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.

Time for change

Citywire A-rated Daniel Roberts, manager of the Fidelity Global Dividend fund , hopes the failed bid will spur Unilever into action to  realise value within the company.

‘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.

Carl Stick, manager of the Rathbones Income fund , agrees that the bid has highlighted the value of Unilever's business. 

He expects the strategic review could result in parts of Unilever being listed or sold.

Bid targets

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.’

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Comments  (3)

  • FrankFrank: 

    The only things I know Kraft make are some awful tinned ham and tasteless cheese slices, probably those things served at McDonald's (95% fat, 5% cheese).

    But they are good at closing down the factories they promise to keep open, I grant them that.

    18:39 on 22 February 2017

  • Grumpy Old Man 2: 

    I WENT MAD WHEN I HEARD THE OFFER FROM KRAFT. I WORKED FOR UNILEVER BACK IN THE 1960s. TO ME, UNILEVER IS AN ANGLO DUTCH TREASURE, NOT TO BE DESTROYED BY A DISHONEST USA BUSINESS WHICH RENEGED ON CADBURY. IT'S GOOD NEWS THAT UNILEVER IS WAKING UP TO A BETTER FUTURE AND I HOPE THEY SUCCEED.

    20:56 on 22 February 2017

  • William Phillips: 

    Ridiculous, unnecessary response.

    Unilever is one of the steadiest Eddies in the world as big corporations go. Having seen off these Americo-Brazilian pirates, why would it panic and fiddle about with a formula that produces 5-10% pa growth year after year, through thick and thin?

    As a shareholder I hope this 'review' is mere gesture politics to the nanosecond-trading fidgets of the market, and that its conclusion is a two-fingered gesture to speculators: 'steady as she goes'.

    15:06 on 23 February 2017

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