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 has 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.
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 privately indicated they would have been prepared to entertain the 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 Old Mutual chief executive, and manager of the company’s £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’, however.
‘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 and industry-leading PE appreciation from a multiple of around 15 times 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.’