Unilever Gains a Little Breathing Room, But No More

(Bloomberg Gadfly) -- Unilever has had its back to the wall since Kraft Heinz Co.'s $143 billion takeover attempt a year ago. After a disappointing third quarter, the Anglo-Dutch consumer goods behemoth had to end the year on a high. It did, but CEO Paul Polman has little room to relax.

Unilever Gains a Little Breathing Room, But No More

Fourth-quarter sales growth (excluding the effects of currency fluctuations and the planned sale of the spreads unit) was 4 percent. That was more than analysts had predicted, and in line with the company's annual target of 3 to 5 percent. The underlying operating margin widened 1.1 percentage point to 17.5 percent, bringing it closer to Unilever's goal of 20 percent by 2020.

Unilever Gains a Little Breathing Room, But No More

To defend Unilever from another takeover bid, Polman has cut costs further to widen the operating margin, bought back 5 billion euros ($6.2 billion) of shares, and agreed to offload the spreads operation to private equity firm KKR & Co.

That helped the stock to hold on to the boost it got from Kraft Heinz's approach -- until Unilever's weak third quarter results helped to erase any additional gains. Thursday's result sent the stock up by 0.3 percent to about 40 pounds, close its level in May.

Unilever Gains a Little Breathing Room, But No More

For Polman's defense strategy to work, he needs to move the shares higher. Without that, Unilever remains vulnerable: Heinz Kraft is now free to make another approach, although the recovery in sterling makes its target more expensive.

The stock trades on about 19 times estimated earnings, slightly less than Nestle SA's multiple of 21. For all Polman's pledges to make the company more dynamic, investors appear to view Nestle's CEO Mark Schneider's overhaul as the better bet.

To narrow that gap, Unilever needs to show that the step-up in sales and volume growth can be sustained through 2018. At the same time, the company needs to widen its margins without jeopardizing sales growth or cutting marketing expenditure to the point where it damages awareness of its brands.

New product launches and revenue contributions from recent millennial-friendly acquisitions like Dollar Shave Club and Living Proof hair care should help. And Unilever could also use the 6 billion euros of proceeds from the spreads sale to buy back more stock.

Polman has seen off one predator -- but a year on from the bid, Unilever's defenses still look less than impregnable.

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 author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

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