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Unilever - Shares jump on $143bn Kraft Heinz approach

George Salmon | 17 February 2017 | A A A
Unilever - Shares jump on $143bn Kraft Heinz approach

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Unilever plc Ordinary 3.11p

Sell: 3,932.00 | Buy: 3,933.00 | Change 27.00 (0.69%)
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Kraft Heinz, purveyor of everything from ketchup to Philadelphia cheese, announced it has made an approach to combine the two groups, which has been rejected by Unilever. The shares jumped 12% on the news.

The offer was $50 per share, an 18% premium to the closing price on the day before the deal was announced. The offer was made up of $30.23 in cash, plus 0.222 shares in the combined group, per existing Unilever share. Unilever said it sees no merit for shareholders, either financial or strategic, and does not see the basis for any further discussions.

While there is no certainty another offer will be made, with Kraft Heinz saying it will work to reach an agreement, an improved offer may be forthcoming. It has until 5pm on 17 March to tell the market whether it will make another offer or walk away.

Our view

Unilever is the fourth biggest consumer goods company in the world by revenue. With a market capitalisation exceeding £100bn, it's easy to see why Kraft's bid to combine the two groups caught the market off guard.

Of course, Kraft Heinz may yet walk away, but it looks set on coming back to the negotiating table. However, Unilever's frosty reaction suggests it will need to significantly up the premium before the other side of the deal will be swayed.

The attractions of Unilever are plain to see. A multi-billion pound advertising budget means that its products remain in high demand, giving the group reliable revenues. There would surely be sizeable cost savings from combining the two groups too. Furthermore, Unilever's exposure to a growing and increasingly wealthy customer base in emerging markets is something Kraft Heinz is lacking.

However, full year results revealed a more downbeat end to 2016 in some of these markets. While the group has put up a good fight, a cocktail of difficult conditions in Latin America has begun to bite. Muted growth in the short term is to be expected.

Nonetheless, the offer comes after a consistent rise in Unilever's share price over the last few years. The stellar performance has been backed by a juicy combination of rising profit margins, sales and dividends. These are exactly the traits superstar investor Warren Buffett always highlights as the key to a great investment - perhaps it's no surprise that his Berkshire Hathaway is Kraft's biggest shareholder. Please note past performance is not a guide to the future.

Fourth quarter and full year results in detail:

For the full year, sales at constant currency rates increased by 4.3%. Operating margin improved by 50bps to 15.3%, helped by margin-accretive innovations, acquisitions and savings programmes. This combination helped earnings per share rise 7% at constant currency rates. The quarterly dividend is raised to EUR0.3201, translating to a 20% increase for UK investors as a result of sterling's weakness.

In the fourth quarter, Unilever's sales volumes declined 0.4% on last year. With prices an average of 2.6% higher, underlying sales grew 2.2% in the quarter, however with growth of 3.7% for the year as a whole, Q4 represents the weakest quarter of the year.

The group says that in a number of countries, volumes have been weak as consumers and retailers adjust to devaluation-led cost increases. Volume growth was negative in Personal Care and Refreshment, with Foods and Home Care increasing volumes by less than 1%.

European markets remain challenging, as price deflation continues to impact trading. While price rises helped Latin American markets deliver 7.2% sales growth in Q4, this is lower than the double digit growth of earlier in the year. The groups says volumes have held up well, but currency devaluation, high inflation and low consumer confidence have been headwinds. In North America growth improved in 2016, driven by strong innovations in deodorants, dressings and premium ice cream.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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