ii view: Unilever firms up unification plan

A change in the consumer goods giant's structure gives greater flexibility to adjust its brand portfolio. 

Unification of legal structure

ii round-up:

Consumer goods giant Unilever (LSE:ULVR) today announced plans to merge its current dual British and Dutch legal structure into a single UK-based parent company, increasing its ability to adjust its brand portfolio either by acquisition or demerger. 

Unilever shares rose by more than 2% in early UK stock market trading. 

The decision follows an 18-month review and has been made increasingly important given the level of flexibility management believes Unilever will require in the new Covid-19 environment. It also comes prior to the UK fully leaving the eurozone at the end of the year.  

The previously announced and ongoing strategic review of its tea business would be made less challenging under a single legal structure. Its Tea brands include Liptons and PG Tips. A possible demerger is one option still being considered. 

Last year, Unilever began a full evaluation of its current categories and brands, with a view to accelerating the pace of portfolio change. 

Day-to-day, little will change for its three divisions. The headquarters of its Foods & Refreshment division, accounting for around two-fifths of sales, will remain in Rotterdam, while its €85 million Research & Development centre stays in Wageningen. The Home Care & Beauty and Personal Care divisions will continue to be headquartered in the UK.

Nils Andersen, Chairman of Unilever, said: "Unilever's board believes that unifying the company's legal structure will create greater strategic flexibility , remove complexity and further improve governance .  We are confident that unification will help Unilever deliver its vision of driving superior long-term performance through its multiple stakeholder business model."

Unification will be implemented through a cross-border merger. Unilever NV will be merged into Unilever PLC. Unilever NV shareholders will receive one new Unilever PLC share in exchange for each Unilever NV share held. Unilever PLC will continue to be incorporated in the UK and will remain a UK tax resident.

Unilever shares will stay listed and traded in London, Amsterdam and New York, with both results and dividends continuing to be declared in euros.

ii view:

Shareholder approval regarding the proposed change of legal structure is now required. Broker UBS points out that this equates to a 'yes' vote required of more than 50% of its NV or Dutch shareholders, many of whom are global funds. This is less than the 75% threshold needed when a previous proposal was outlined going from PLC UK to the Netherlands. 

More broadly, an increase in management’s flexibility to adjust the group’s businesses and potentially enhance shareholder value is a positive development. Tea for example is not now proving the hit with younger consumers that it once did. 

For investors generally, sales are yet to really impress and a forward price/earnings (PE) ratio of around 20, broadly in line with both the three and 10-year averages, doesn't scream value. First-quarter underlying sales in the Emerging Markets declined by 1.8%. But Unilever has a strong record of recovering from setbacks. A historic and prospective dividend yield of over 3% is becoming increasingly rare in a coronavirus hit world. In all, Unilever shares continue to deserve their place as a staple in many investor portfolios.  

Positives: 

• Provides diversity in both product type and geographical location
• Defensive qualities in uncertain times

Negatives:

• Previously lowered sales estimates
• Discount retailers often only stock their own branded labels

The average rating of stock market analysts:

Buy