'Why I bought Unilever, and how it needs to change'

unilever-warehouse

It's been an interesting week for Unilever, after what amounted to one of the briefest merger flirtations ever, from Kraft Heinz, saw the Anglo-Dutch consumer goods firm's share price seesaw.

When news emerged on Friday (17 February) of a near record-breaking $143 billion (£115 billion) bid from Kraft, Unilever's share price shot up 15 per cent to a high of 3,836p.

The initial bid was rejected and the Warren Buffett-backed US firm backed down on Sunday after realising it would face more shareholder resistance than it might have expected, sending Unilever shares back down to 3,525p to start this week.

This prompted John Bennett, manager of the Henderson European Focus investment trust, a Money Observer Rated Fund, to take a position in Unilever. The manager says he was 'intrigued enough to have taken a small 1 per cent position' in the stock on its fall in price.

PORTFOLIO RESTRUCTURE ON THE CARDS?

Bennett, who also runs an open-ended fund with the same name, believes the failed offer should encourage the firm to 'examine its portfolio'.

Unilever currently owns a diverse range of brands, from ice cream makers Ben & Jerrys and Magnum to home care products including Domestos and Persil, as well as soaps and deodorants such as Dove and Lynx.

Bennett explains: 'Unilever should use this as an opportunity to ask itself why it should remain a conglomerate of food and consumer and household products.

'It might have very good reasons to, but it should present those reasons to shareholders. I actually bought when it fell [on Monday 20 February] because I think that's what might happen.

'I think the Unilever management has done a very good job, but maybe now's the time to use this episode to say "what about this portfolio? Is it right that it stays together?".'

Bennett adds that, had the takeover gone ahead, there is a good chance the newly created firm would have done something similar and, playing to Kraft's strengths, kept the food arm while offloading the consumer goods side.

He draws similarities between Unilever and a firm he has owned for a longer period of time, Nestle, which he says may be a bigger 'portfolio-reshaping candidate'. Bennett says the Switzerland-listed firm has been a 'lazy company', but expects new CEO Mark Schneider will 'rattle the cage a bit'.

Schneider has promised to restructure the firm, and Bennett expects his background in pharmaceutical companies means the Kit Kat manufacturer will now focus more on its healthier foods, rather than sweet products.

'They've got stakes all over the place in different businesses,' he continues. '[It needs to ask] is it in the right geographies, is it in the right product categories?

'They have been getting into more health-based nutrition, and if you look at the CEO who joined last year, I think he if anybody is going to bring more of a focus on trying to move towards health and nutrition-based foods.'

M&A: NOT A FAN

Bennett adds that he is not a fan of mergers and acquisitions (M&A) in general, as very few CEOs buy assets on the cheap. 'CEOs tend to get testosterone-fuelled when their share prices go up, and then they're up for M&A,' he says, adding that 'the party really gets in full swing when things are expensive'.

For this reason, he believes the long bull run in consumer goods has reached its peak, with mergers stepping up a notch after France's Danone in his opinion 'seriously overpaid' at $10 billion for WhiteWave Foods and Reckitt Benckiser purchased baby formula firm Mead Johnson for $16.6 billion.

'Witness the dotcom boom - AOL and Time Warner thought they could redraw the landscape. You got many mergers in tech back then, right at the peak. [Similarly], you got mergers in mining at the peak of that so-called supercycle.

'You have to wonder whether we're coming towards the end of the [consumer] staples boom, because I do think we're coming to the end of the bond bull market and it could well be that the bells are starting to ring.

'I'm not convinced that last week's bid for Unilever rings the bell for the top, but I think it indicates that we're getting very near the top for easy-to-own, low-volatility stocks.'

Due to this, Bennett says he is positioning his portfolios back into value-based stocks, including banks.


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