2017/04/06

What Unilever Is Doing to Keep Shareholders Happy After Turning Down Kraft



Unilever promised a multi-billion pound program of shareholder rewards on Thursday after a corporate rethink sparked by a takeover approach from Kraft Heinz (KHC, -0.26%), aiming to prove it can generate lucrative returns as an independent company.
Under a restructuring sparked by the rebuffed $143 billion offer by its U.S. rival, the maker of Dove soap and Knorr soup set out an accelerated cost-saving plan, the sale of its Flora to Stork spreads business where sales are declining, and a review of its dual-headed Anglo-Dutch structure.
As part of its strategy to justify its rejection of Kraft Heinz's approach, Unilever will also splash out 5 billion euros ($5.3 billion) on a share buyback and will raise its dividend 12% this year.
Unilever (UL, +1.22%), one of Europe's biggest blue-chip stocks, called the Kraft episode a "trigger moment" to assess its business, as the global packaged goods industry faces slowing growth and greater competition.
In the weeks since Unilever announced the review, some analysts had speculated it would split into two in a dramatic reversal of its strategy, but executives said this was not on the cards and repeated the rationale that there are benefits from having both foods and personal products businesses.
"We need to accelerate our plans to unlock further value faster, and this was brought home to us by the events of February," Chief Executive Paul Polman said.
"There is no doubt that however short-lived and opportunistic it (the Kraft approach) was, it did raise expectations," Polman added. "We are absolutely determined to use it as an opportunity to place Unilever on an even stronger footing."
Unilever executives said they stood by their strategy to grow sales steadily in the long term and that this approach had found support in talks they held with investors including all of the top 50 shareholders.
"The first thing they said was that the long-term compounding model that we have shouldn't change, but we need to deliver a little bit more value in the short term," said Chief Financial Officer Graeme Pitkethly.
Cost Savings
Unilever's London-listed shares, which had hit a record 4,088 pence in recent weeks ahead of Thursday's announcement, were up 0.4% at 3,957p by 9:00 a.m. GMT, outperforming the FTSE 100, which was down 0.6%.
The group said it would speed up a cost-savings plan, targeting a 20% underlying operating margin, before restructuring, by 2020, up from 15.3% in 2016.
Pitkethly told Reuters that much of the margin improvement would come from the food business, which it now plans to combine with the refreshment business, which includes Ben & Jerry's ice cream and Lipton tea.
Unilever also said it would take on more debt, at least in part to finance acquisitions, targeting net debt of two times core earnings or EBITDA. Its leverage ratio has been below one time for more than half of the past 20 years, Jefferies analysts have said.
"Some had speculated Unilever could go to three times to free up even more cash, but it’s remaining fairly conservative," said Neil Wilson, senior market analyst at ETX Capital in London. "The move ought to deter speculative bids such as that of Kraft Heinz. Unilever was vulnerable to a takeover exactly because it’s been so free of debt."
The group will launch a share buyback this year of 5 billion euros having not had a buyback program in place since 2008.
Pitkethly said merger and acquisition activity should pick up as the company increases its appetite for leverage, but said the strategy regarding big deals was unchanged.
He said Unilever would consider combining its dual-headed structure—in Britain and the Netherlands—into one, but said the choice of which might stand would not be impacted by Brexit.
Regarding the shrinking margarine and spreads business, which is one of its founding businesses, Pitkethly said it was already seeing a lot of interest, particularly from financial players such as private equity firms.
The company stood by its 2017 sales target of growth of between 3% and 5%, supported by brand and marketing investment of about 30 billion euros over the period to 2020.
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