Kraft’s aborted bid for Unilever: the implications for HUL
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Unilever succeeded in fending off Kraft-Heinz Co.’s takeover bid, but it has conceded that it needs to do more to improve its valuation.
It has said it will review options to improve shareholder value, covering products, the organization, its cost structure and its balance sheet. In short, whatever value Kraft Heinz hoped to add post-acquisition, Unilever will try to offer the same to its shareholders.
These changes may have an indirect or direct impact on the Indian unit, Hindustan Unilever Ltd, one of Unilever’s crown jewels. But emerging markets were partly to blame for Unilever’s valuation gap, said its management, as growth has slowed in the region, which contributes about 60% to revenues.
Unilever was valued at a price to earnings per share of 19.1 times as of 16 February, according to the company, while an average foods and HPC (home and personal care) company was valued at 21.9 times. It believes its valuation should be higher than this average.
What actions might Unilever take to get a better valuation? Cost cutting and better utilization of cash are good candidates. In India, HUL has already been cutting costs, but this process may accelerate. There may be a culling of products or variants, too, to sharpen focus, either at a global or local level. On the balance sheet front, a buyback by Unilever will not have any local impact. If Unilever decides to increase its stake in HUL—its current 68.2% stake in HUL can go up to 75%—that should benefit HUL’s valuations.
After the Kraft Heinz bid failed, there is speculation that Unilever may buy out one of its smaller rivals. If this happens to be a global company, then it can have a local impact; but not if it’s a developed market-focused company. Unilever may even cast the net for smaller brands in different countries, filling gaps in its own portfolio. Another matter of speculation is a vertical split, with one company running personal care and another managing the foods business. This seems unlikely, as there are benefits to having both under one organization.
In a little over a month, the contours of Unilever’s restructuring programme should become known. A more aggressive Unilever should normally mean good news for HUL, as it will seek ways to step up sales growth and profitability. One can expect HUL to play a key role in emerging markets in this transformation. HUL’s sales in the 12-month period ended December was 8.7% of Unilever’s 2016 sales, while its net profit contributed 11.2%.
This unexpected exercise may be good for its share as well. It gives shareholders something to look forward to, as domestic demand outlook is uncertain post-demonetization, especially in the rural markets. HUL’s share has been underperforming and has declined by 1.2% since early October, while ITC Ltd has gained by 9.7% and the S&P BSE FMCG Index has risen by 3.5%.