Unilever's Marvelous Anti-Kraft Work Has Left a Weak Spot
(Bloomberg Gadfly) -- How time flies when you're under the gun.
It might seem like yesterday, but it is six months since Kraft Heinz Co. abandoned its $143 billion bid for Unilever.
That means that under U.K. takeover rules, restrictions on the U.S. group returning with another bid have expired.
In many ways, Unilever looks a different company to the one that came under the brief siege in February.
After the bid spurred Chief Executive Officer Paul Polman into a strategic review, the company's planning to buy back 5 billion euros ($5.9 billion) of shares, ramp up cost savings, raise the operating margin by a quarter and offload the spreads arm.
These efforts have helped the shares rerate since the approach.
That would undoubtedly make another tilt by Kraft and its backers, 3G Capital and Warren Buffett, more expensive. What's more, although some shareholders believed Unilever rebuffed Kraft Heinz too quickly, Polman appears to have done just enough to retain their support.
And he still has a couple of levers to pull. The first would be buttering them up with a knock-out price for spreads. Private equity groups are circling the unit, with bids valuing it at about 6 billion pounds ($7.7 billion), according to Sky News.
Unilever has made lifting its underlying operating margin to 20 percent by 2020 a cornerstone of its strategy to retain its independence. And that appears to be paying off. In the first half of its financial year, the underlying operating margin rose from 16 percent to 17.8 percent. That's still trailing Kraft Heinz.
The risk is that with so much focus on the margin, Unilever is unable to maintain sales growth at 3-5 percent annually. In the first half, all of the 3 percent underlying sales growth came from price increases. Volumes were flat. With headwinds in some key emerging markets, and pressures on the consumer in developed regions, lifting both sales and margin looks challenging.
As my colleague Chris Hughes has argued, if Polman can't magic up more robust growth, he will have to buy it.
Slowing sales momentum, or pricey M&A to reboot it, could weaken Unilever's carefully crafted defenses.
Were these fundamental changes to fall short, a more radical option is available. Unilever's reviewing its so-called dual headed structure, where it has one company publicly traded in London, and the other in the Netherlands. A move to a Dutch domicile could offer greater protection in the event of another takeover approach.
Given the progress Unilever has made, Polman doesn't need to go down this route. But it's a useful trick to have up his sleeve if Kraft Heinz returns or an activist investor weighs in.
--With assistance from Gadfly's Chris Hughes
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.
To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.