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Buxton urges Unilever to be strong after 'near death' Kraft shock

Old Mutual fund manager Richard Buxton warns Unilever not to return to bad old days with strategic review after Kraft/Heinz's failed bid approach. 

Buxton urges Unilever to be strong after 'near death' Kraft shock

Old Mutual fund manager Richard Buxton has urged Unilever boss Paul Polman not to sacrifice its core strengths – in particular its iron-clad balance sheet – as it reviews its business after rebuffing the Kraft/Heinz takeover.

Unilever (ULVR) pledged a full strategic review of the business after seeing off the $143 billion (£115 billion) bid from the American food conglomerate and its private equity backers 3G. This weekend it was reported to be considering the £6 billion sale of some of its food brands, including the Flora and Stork spreads.

While the bid, which would have attracted anti-trust reviews and probable disposals around the world, found little public support in the City, a majority of Unilever investors have indicated they would have considered an offer.

More than half (53%) told a Bernstein Research survey they would have liked talks to continue, although 40% said they would have sought a 40% premium rather than the proffered 18%.

In an open letter published by the Sunday Times the chief executive of Old Mutual Global Investors and manager of its £2.1 billion UK Alpha fund, urged the company not to sacrifice the core appeal of the fortress-like appeal of the business to highly-leveraged ‘voices of short-termism’.

‘Unilever is a poster child for the pursuit of long-term, sustainable returns,’ Buxton wrote.

‘Naturally, you and your board are scarred and scared by this approach. You feel the need to respond. Turn this into a different battle. Not one against Unilever, but against business models. Defend a strong balance sheet. It is not a sign of corporate weakness.

‘Stuff happens. Today’s efficient balance sheet can turn into tomorrow’s forced disposals — corporate life is littered with examples. To cave in to pressure to increase debt would go against the grain of efforts to encourage more, not less, long-term thinking.

‘Do not succumb to the voices of short-termism. Rally your board, employees and shareholders around your business model and balance sheet. It is not just Unilever at the crossroads: the right or wrong sort of capitalism is at stake.’

Unilever currently holds £11 billion in cash and short-term assets on its balance sheet with zero short-term debt, on an operating margin of over 15%.

While the size and security of the company has in the past bred complacency and risk aversion, Buxton noted that the company had reformed its culture in the past decade to promote operational efficiency and innovation.

These had been accompanied by a push back-against short-termism with the abandonment of quarterly reporting and an emphasis on sustainable growth, he added. This had been rewarded with a steady re-rating with the shares moving from a multiple of around 15 times earnings to above 22 times in the last five years.

'Unilever is a completely different company from [where it was] 14 years ago. It is successful and delivering. Now, in the aftermath of the approach by 3G Capital-backed Kraft Heinz — a “near-death” experience — you feel compelled to undertake a strategic review, with the aim of delivering value to shareholdersm,' Buxton wrote.

‘The dispiriting options include accelerating cost initiatives, selling or demerging the foods business, increasing gearing to make acquisitions, or simply increasing leverage to return capital to shareholders.

‘This is an outdated business model that has been proven to fail. The approach by 3G/Kraft Heinz, using your strong balance sheet to fund a raid on you, does not mean that you should feel obliged to undertake a minor version of their own business model yourself.’

Unilever shares gained 25p or 0.6% to £40.65. 

5 comments so far. Why not have your say?

David Chadwick

Mar 20, 2017 at 17:43

I have no problem with Mr Buxton expressing his views about Unilever either openly or in private to Mr Polman - he is quite entitled to do this whether his fund holds Unilever shares or not.

But why does he not hold shares in Unilever if he is acknowledging it is a "successful and delivering company"? I think Old Mutual investors should be told.

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richard tomkin

Mar 20, 2017 at 22:58

Unilever did not " see off " Kraft : on the contrary,following the controversial takeover of ARM Holdings,HMG made it quite clear to the Americans that another acquisition of a major UK corporation would not be acceptable.The memory of Rowntree was also still fresh.

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Mar 21, 2017 at 02:45

I agree with Mr Chadwick. Unilever is not listed in the top ten holdings of any of the five funds Buxton runs. Of course, he may hold a smaller piece of it, but I feel an impassioned plea like this would have more impact had it come from a major investor. It's all very odd.

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richard harding

Mar 21, 2017 at 05:13

Read the February report for the Lindsell Train Inv. Trust, a long term holder of Unilever.

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William Phillips

Mar 21, 2017 at 13:31

As a Unilever holder I agree with Mr Buxton.

Nobody was attacking Unilever as sluggish or badly run until Warren Buffett and his Brazilian mates (and he has his own problems with decelerating growth at BH and wonky strategic judgement, viz. Tesco) formed up and dangled their chequebook under fickle investors' noses. Then all of a sudden those lured by the promise of a short-term gain began this pharisaical denunciation of one of the best large businesses on the planet.

Meanwhile the financial engineers and leech-like armies of 'advisers' and middlemen licked their lips at the though of M&A profits sticking to their parasitical fingers.

I hope the rebuffing of Buffett signals a change in inclinations- away from the nanosecond wheeling-and-dealing nonsense of stock markets (which has accompanied almost 20 years of stagnation in values) towards appreciation for the steadfast construction and maintenance of a strong world-beater which has been the Unilever story since 1930.

If ULVR goes on knocking out dividends +6% four time a year, that will do for me.

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