Unilever’s promise to compensate the Netherlands will force her to be vigilant

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Unilever39s Promise To Compensate The Netherlands Will Force Her To.jpg
Unilever39s Promise To Compensate The Netherlands Will Force Her To.jpg

The CEO of Anglo-Dutch Unilever has offered a hostage to luck. In announcing a plan to unify his twin holdings in London, Alan Jope promised that if he separated his food and soda unit, it would be listed on the Amsterdam Stock Exchange. If he stumbles, investors could use the hypothetical promise against him.

The compromise seems like a concession to disappointed Dutch politicians and shareholders. Unilever has no plans to list the division. Also, there are no signs that doing so will unlock any values. The food unit had 3.4 billion euros of debt in 2019, after discounting currency movements. If it were in line with Danone (15 times debt), it would be worth $ 51 billion.

Unilever’s personal care division had an underlying EBIT of $ 5 billion in 2019, which is worth $ 95 billion if it is valued the same 19 times as Colgate-Palmolive. The home care business is similar to that of Germany’s Henkel, which is trading at a historical debt of 11 times. That implies a value of 18,000 million.

After subtracting $ 23 billion of net debt, this calculation suggests that the three divisions have a combined equity value of $ 140 billion. That’s just 5% more than the firm’s current market capitalization – not enough to justify the high transaction costs and lost synergies that would come with a breakup. And an independent food business may have a harder time negotiating attractive terms with Walmart or Amazon.

But this does not mean that Joppa can relax. Food division revenue fell nearly 2% in the first quarter. Although the virus weighed on demand, Nestlé grew 4%.

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Persistent poor performance could change arithmetic. Assuming Unilever manages to unify its two holdings into a single London-listed entity, it will also have fewer defences against investors. Joppa’s promise could end up being a threat to activists.