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What next for Unilever shares?

It’s been a rough month for Unilever after its failed takeover of GSK’s healthcare business, but could an activist investor drive a revival?

The drama continues at Unilever PLC as, following its abortive bid for Glaxo’s healthcare division, it was revealed that US investor Nelson Peltz has taken a stake in the company. Shares in the food producer rose 6% on news that the activist shareholder has built up a holding in the owner of Marmite and Magnum ice cream via his vehicle, Trian. Peltz is known for taking a position at Unilever rival Procter & Gamble and working with the management to make improvements after a long-running battle to secure a seat on the board.

A major setback

Unilever is licking its wounds post three failed bids – the final one worth £50bn for Glaxo'shealthcare arm, which includes Sensodyne and Advil. Chief executive Alan Jope insisted the business was a “strong strategic fit” and that it would create new opportunities in emerging markets.

He told investors that Unilever’s future lies in “materially expanding its presence in health, beauty, and hygiene,” which he believes offers “higher rates of sustainable market growth.”

However, Glaxo and Pfizer Inc (All Sessions), who own the healthcare business, and Unilever’s investors had other ideas. Glaxo’s board said the bids “fundamentally undervalued” its business, while Unilever’s shareholders had concerns over the scale and workability of the deal, which would have been one of the biggest ever seen in the London market.

Fund manager Terry Smith described the failed deal as a “near-death experience, while analysts at Bernstein Bank predicted it would deliver £10bn of “value destruction” for shareholders.

Unilever shares dropped to a year low of 3516p – down 32% since 2019.

Where does Unilever go from here?

Jope says he is “committed to accelerating the company’s growth and repositioning the portfolio into higher growth categories.” In the meantime, he has announced it is to restructure, cutting 1500 jobs worldwide, including 15% of senior management and 5% of junior management positions. It is axing its matrix structure and reorganising around five business groups: beauty and wellbeing, personal care, home care, nutrition and ice cream.

“Moving to five category-focused business groups will enable us to be more responsive to consumer and channel trends, with crystal-clear accountability for delivery,” said Jope. “Growth remains our top priority and these changes will underpin our pursuit of this.”

But will this be enough to placate shareholders? Recovering some ground to 3820p, the shares have lost 26% of their value since peaking at 5196p in August 2019.

Activist Marmite

Love them or hate them, activist investors can sometimes lead change. Could Unilever’s investors see Peltz work his magic? After the activist hedge fund manager took a stake in Procter & Gamble in 2018, and the share price doubled from around 75p to 150p by 2020.

Martin Deboo, analyst at Jefferies, expects Trian to push for breaking up parts of Unilever and spinning them out. “We have long been of the view that the right path to unlock value at Unilever is via a faster rate of disposals from its slow-growing foods businesses, or a separation between foods and household and personal care, via a sale or spin [out],” he said in a note, adding that the “fox would now appear to be inside the henhouse.”

Meanwhile, analysts at Barclays said in a note, “from Unilever’s perspective, the status quo is not an option. It would seem that the stars are aligning with both Unilever management and an activist pushing for more urgency.”

With fourth quarter figures due on February 10th, investors could find out more soon.

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*Based on revenue excluding FX (published financial statements, June 2020).

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