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Will Unilever’s planned Spreads exit, promised shareholder returns be enough to stave off any future takeover moves?

Thursday, April 6, 2017 5:17
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(Before It's News)

Butter is said to be better for you to eat now, having been demonised by the health fascists in the past few decades, so a move to exit its Spreads business – which includes such substitutes as Flora and Stork margarine – looks to be sensible for consumer products giant Unilever PLC (LON:ULVR).

But will this disposal or demerger move- part of a major strategic review of the Anglo-Dutch firm’s business launched at the end of February after the shock of a failed bid move for the group by US food giant Kraft Heinz Co (NASDAQ:KHC) – be enough to placate shareholders and stave off any future takeover moves?

WATCH: ETX Capital’s Neil Wilson on Unilever moves … READ: Unilever reveals strategy review outcome …

George Salmon, equity analyst at Hargreaves Lansdown: “The planned separation of Unilever’s spreads business, which includes names such as Flora and Stork, is the result of the decline the division has seen in recent years, particularly in the US.

“The reality of 21st century life is that people are more likely to grab breakfast ‘on the go’ rather than sit around the table with a few slices of toast.”

He added: “The sale of the spreads business, together with the news that Unilever is reviewing its UK-Netherlands dual listing, may well grab the headlines. However the big news for shareholders is the more aggressive plans for increasing profitability.”

Ramping up returns …

Aside from the disposal move the Marmite to Dove soap group is also ramping up shareholder returns through a 12% increase in its dividend and the launch of a €5bn share buyback in the coming year.

The FTSE 100-listed firm is also targeting a 20% underlying operating margin, before restructuring, by 2020, and establishing a net debt/ EBITDA target of 2x.

Neil Wilson, senior market analyst at ETX Capital said: “The Anglo-Dutch giant wants to make sure shareholders are not tempted by another bid and is throwing cash at the problem “.

He added: “It smacks a little of short-termism but we have to see whether the offloading of Spreads and higher gearing pays off as it looks to grow its business in emerging markets, where it generates 57% of sales and where future growth needs to come from.”

Wilson pointed out that Unilever was vulnerable to a takeover exactly because it’s been so free of debt.

He said: “Kraft Heinz planned to leverage against Unilever’s balance sheet to fund the takeover. Low debt left it exposed – the extra leverage should help make it clear this strategy is not welcome or possible.”

A poll by one broker had shown only half of Unilever shareholders supported the group’s firm rejection of the Kraft Heinz bid , while half wanted the firm to pursue the offer.

The bid was a massive wake up call and Unilever has realised it needs to do more for shareholders, but it also has to improve margins to pay  as well, as  “bribes alone won’t work”, according to Wilson.

Margins focus …

The test will be whether Unilever can achieve that underlying operating margin of 20% by 2020, up from the current 15% margin.

The issue is that that the consumer staples business appears to be heading for ex-growth, with Spreads a case in point, declining for 20 years according to Unilever’s chief executive, Paul Polman, even though margins in that business are pretty high at 25%.

In a note to clients, Chris Wickham, analyst at Whitman-Howard said: “The spreads business accounted for €1.5bn to €2bn of sales in FY2016.  By selling spreads we estimate margin will fall by 500bps.”

He added: “One of the ways which Unilever are planning to improve margin is by combining the Foods and Refreshment into one organisation. 

“The extent this move will have on margin accretion is unclear.  The market have for a while viewed Unilever as having two divisions, Foods and Refreshment and HPC (Home and Personal care).”

Overall, shareholders want higher returns and Unilever is aiming to deliver them, with the City verdict looking to be cautiously optimistic so far, as its shares in London had ticked up 0.4%, or 15.5p to 3,955p by mid morning after a weaker start.

Story by ProactiveInvestors


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