Unilever's Kick in the Pants

It took an approach from Kraft Heinz to spark management into life, but the results of

When Unilever announced that it was to undergo a strategic review in response to the acquisition attempt by Kraft Heinz, we said in a note on Feb. 22 that we would like to see three outcomes: 1) an acceleration in cost-reduction initiatives; 2) asset sales, particularly of the spreads business; and 3) increased shareholder returns. Unilever has delivered all three.

The most significant aspect of the review, in our opinion, is the new 2020 operating margin target of 20%, up from 15% in 2016. If achieved, this would go a long way to closing the profitability gap to Unilever’s best-in-class peers such as Reckitt Benckiser and Kraft Heinz, whose margins are in the mid-20% range. Management has also committed to achieving 100% cash conversion over the same time frame.

The second significant development is the intended disposal of the spreads business. This was the minimum course of action management could take, in our opinion, to satisfy investors’ expectations for portfolio optimisation. The business is strongly cash-generative, but has been declining at a mid-single-digit rate. We value the assets at around EUR 6 billion, and think Kraft Heinz and private equity players will likely show interest. Although this asset sale falls well short of a broader exit from food, we think more of Unilever’s food assets may ultimately be sold, particularly if the acquirer is a strategic one.

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