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Unilever to Review Cost/Balance Sheet Post-KHC Offer

Zacks Equity Research

Unilever PLC UL is considering a comprehensive review in order to return more cash to shareholders and undertake medium-sized acquisitions as well as indulge in more aggressive cost cuts, as per Financial Times. Post the news, Unilever shares rallied 1.43% on Mar 15.

The move came after the maker of Dove products and Ben & Jerry’s rejected Kraft Heinz Co.’s KHC $143 billion surprise offer in Feb 2017, as Unilever did not find any strategic or financial benefit in it. However, this bid compelled the company to undertake a business review to evaluate its options regarding its portfolio, organization, cost structures, balance sheet and use of cash. The review results will be announced in April.

In this regard, Unilever is considering raising its net debt from 1 times now to 2.5 or 3 times earnings before interest, tax and depreciation. Further, in order to boost shareholder returns, the company has already announced a program to save 1 billion euros by 2018.

Further, as per Financial Times, the company is making efforts to dispose of its struggling spreads division, as Unilever has been witnessing a slowdown in its spreads business, which is hurting profits at its Foods segment. However, currently there is no possibility of separating food business from the home and personal care businesses.

Unilever PLC Price, Consensus and EPS Surprise


Unilever PLC Price, Consensus and EPS Surprise | Unilever PLC Quote

In another news flow, Unilever CEO has urged the U.K. government to alter the nation's takeover code rules after Kraft Heinz made an offer to takeover the former, as per Financial Times. One of the key features of U.K. takeover rules is that once an expression of interest for a company has been made, suitors will have only 28 days to make a formal bid, or they must withdraw for six months.

During those 28 days, the target company is closely monitored by the government's takeover panel. On this, Unilever said target companies should be given more time to defend themselves to look for the interests of stakeholders beyond shareholders.

Meanwhile Unilever continues to struggle with declining volumes in Brazil and a soft economy in Russia. Further, the company is witnessing weakness in the developed markets with little sign of recovery in North America or Europe. Additionally, it has been delivering weak results for the past few quarters due to sluggishness in the emerging markets, which account for about two-thirds of the company’s total revenue. Though the emerging markets offer robust long-term prospects, they are generally volatile.

Overall, we are encouraged by the fact that Unilever is consistently focusing on product improvement through innovation. The company has also accelerated its cost containment measures to cut down unnecessary costs. Unilever has also entered into many deals to fortify its position in home care and personal care products. These acquisitions will strengthen its portfolio and generate substantial revenues.

Coming to the share price movement, prices have spiked following the news of the probable takeover. The stock rallied 17.76% since Feb 16, outperforming the Zacks categorized Soap & Cleaning Preparations industry, which gained just 6.46%.

Unilever currently has a Zacks Rank #2 (Buy).

Stocks that Warrant a Look

Other favorably placed stocks in the food industry include Ingredion, Inc. INGR and Pinnacle Foods, Inc. PF, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Ingredion has a long-term earnings growth rate of 11.00%, Pinnacle has a growth rate of 8.33%.

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Unilever PLC (UL): Free Stock Analysis Report
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