Breakingviews: Unilever may be tempted by artificial sweeteners

Published Wed, Feb 22 20173:24 PM ESTUpdated Wed, Feb 22 20173:38 PM EST

Breakingviews

Carol Ryan

Kraft Heinz 's botched bid may yet enrich Unilever investors. After fending off the U.S. group's unwelcome $143 billion proposal, the Marmite maker said it will focus on boosting shareholder return. Boss Paul Polman has options including cost cuts and selling the group's troubled spreads business. The temptation to bulk up with a dramatic acquisition could become a constant theme. Unilever announced on Wednesday that the board will look for ways to unlock value for investors and plans to complete a review of the company by early April. The news sent the stock up 3 percent – more good news for Unilever investors whose shares now exchange hands for 44 euros a piece, 11 percent more than their Feb. 16 pre-leak price. The question is what the company does next. Plans already in place to boost lowly 15 percent operating margins by between 40 basis points and 80 basis points a year will now be invigorated to ensure the upper level is hit. The nearer it can get to Kraft Heinz's 23 percent margin, the more the shares will be worth. More from Breakingviews: Aramco golden ticket has risks for Western banks Could Unilever be more daring? A Breakingviews sum-of-the-parts analysis of the company suggests there is little value to be gained from breaking it up. However, a tidy-up of Unilever's soup-to-soap portfolio may be in order. And a sale of its underperforming spreads business, home to Country Crock and Flora margarine brands, is an obvious target. The unit is a drag on Unilever's food division and investors have long wanted rid of it. Based on forecast EBITDA of 606 million euros in 2017, it could fetch around 5.5 billion euros on the nine-times multiple that other low-growth but cash-generative food businesses such as St-Hubert have gone for. Leveraging up from its current 1.3 times net-debt-to-EBITDA multiple to say, 2.5 times – slightly higher than peer Danone – is another idea for Polman to explore. Using the roughly 11 billion euros of fresh debt to buy back 9 percent of its equity could push the share price above 47 euros. But the real question occupying City analysts is whether Unilever should bulk up with a big acquisition. Consumer-goods group Colgate may be an attractive target. Unilever could fund a potential 78 billion euro price tag by selling its food and refreshment business for 56 billion euros, according to Berenberg research. The bull case is that the combined group's net income could reach 7.3 billion euros. On the sector's 22-times forward earnings multiple, Unilever's share price could theoretically top 56 euros. That option, however, comes with significant execution risks. It would push Unilever's debt load to around three-times EBITDA, and on more conservative Berenberg net income estimates the implied share price would only be 48 euros. Still, Polman will be aware the option is lurking in the background. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

An employee prepares a scoop of ice cream at the Miko Carte d'Or, part of the Unilever group, factory Saint-Dizier, France, May 4, 2016.

Philippe Wojazer | Reuters

Unilever announced on Wednesday that the board will look for ways to unlock value for investors and plans to complete a review of the company by early April. The news sent the stock up 3 percent – more good news for Unilever investors whose shares now exchange hands for 44 euros a piece, 11 percent more than their Feb. 16 pre-leak price.