Unilever back in political spotlight over UK return

When former Unilever chief Paul Polman tried to shift the domicile of the Anglo-Dutch consumer goods group to the Netherlands two years ago, his final big move as chief executive collapsed in open acrimony with shareholders.

Now his successor Alan Jope, who took charge last year, is entering the same troubled territory. He and chairman Nils Andersen said on Thursday they would seek to create a single entity based in London.

The move brings political attention back on to the world’s third-largest consumer products company. A spokesperson for the UK prime minister, Boris Johnson, who is under pressure over coronavirus and Brexit, was quick to hail the plan as a “clear vote of confidence in the UK”, while the Dutch minister for economic affairs said he “regretted” it.

But the duo now running Unilever — which makes products from Hellmann’s mayonnaise to Domestos bleach — have been prepared to risk the political spotlight and further negotiations with shareholders in pursuit of a much-needed prize: the ability to quickly carry out acquisitions, spin-offs and mergers aiming to enable a return to growth. 

“We think the post-Covid world is going to be a dynamic environment where there might be opportunities to acquire businesses,” Mr Andersen said on Thursday. 

Column chart of Organic sales (annual % change) showing Unilever's slowing growth

Unilever will need the approval of half the shareholders in its Dutch entity and 75 per cent of those in its UK group to push ahead, which it wants to do before the end of the year.

In 2018, big shareholders were angered after Unilever failed to speak to them in advance about the plans to become a Dutch company. This time, the company also decided against speaking to shareholders before the announcement, leaving investors scrambling to set up calls with executives.

But unlike in 2018, early reactions were positive. Columbia Threadneedle Investments, which had strongly opposed the plan to shift to the Netherlands, said it was in favour, as did Legal & General Investment Management, a top-10 investor, according to S&P Capital IQ.

Angeli Benham, investment stewardship manager at LGIM, said: “We were delighted to see the announcement this morning with an implementation proposal that is consistent with the long-term interests of our clients and enables us to continue supporting the company.”

Alan Jope, Unilever’s chief executive: ‘Everybody I’ve spoken to agrees that, strategically, Unilever is better as a unified company’ © Bloomberg

Rupert Krefting, head of stewardship at UK-based M&G, a top 30 shareholder, said the proposal was “good news for investors”, while the Dutch asset manager PGGM, which runs €250bn of investments on behalf of pension funds, also said it was in favour. 

“PGGM appreciates very much how Unilever has integrated sustainability into its business strategy . . . we expect the company to develop this further as a single British company with more flexibility to pursue larger M&A projects,” it said.

Unilever had been reporting sluggish figures even before the pandemic reduced its underlying sales growth rate to zero in the first quarter. The impact of coronavirus, especially on its ice cream and food service divisions, increases the urgency for Mr Jope to show he can transform the group.

The company needs to revamp its portfolio — Unilever has already said it may spin off its tea division, one spur for the change of structure.

Unilever's divisional breakdown by share of group turnover and operating profit (%)

Mr Jope told reporters the food division needed to move with the times, including developing more plant-based foods and adapting to people cooking from scratch in the pandemic.

Société Générale analysts said the shift would revive talk of mergers with rivals such as Reckitt Benckiser or Colgate, although executives at Unilever played down the prospect of such large-scale deals, together with the prospect of spinning off its food division.

Mr Jope said: “Everybody I’ve spoken to agrees that, strategically, Unilever is better as a unified company.”

The group’s 90-year-old existing structure, with entities in the UK and Netherlands, makes equity-based transactions difficult and requires unwinding complex internal structures to make disposals. Some of its many subsidiaries are owned by the Dutch group, some by the UK group and some by both.

Royal Dutch Shell, which had a similar dual structure, simplified it in 2005 to a Dutch headquarters and a UK primary listing.

One person familiar with Unilever said the plans would leave the company with fewer constituencies to negotiate with, and save it the pain of a fight with the British tabloid newspapers.

Crucially for UK-based shareholders, a consolidation of Unilever under the UK legal umbrella would not result in the company’s removal from the FTSE 100 index. This was a key point of contention in 2018: becoming a Dutch company would have removed Unilever from the index, forcing many investors to sell the shares without the premium associated with an acquisition.

Unilever said on Thursday it expected to remain in both the FTSE 100 and the Dutch AEX index.

Another stumbling block under Mr Polman was a perception that Unilever was seeking the protection of the tougher Dutch takeover code, which would shield it from hostile approaches such as that of Kraft Heinz in 2017. Unilever narrowly fought off Kraft Heinz’s bid, which Mr Polman called a “near-death experience”.

Home care outshines Unilever's other divisions; underlying annual sales growth (%)

The previous attempt to consolidate Unilever’s legal structure came against a backdrop of troubled relationships with some shareholders.

Mr Polman “was famously hostile towards investors with short-term horizons”, said Martin Deboo, analyst at Jefferies.

He noted that the new strategy followed a change in nationalities at the top of Unilever: Mr Polman and the former chairman, Marijn Dekkers, were both Dutch. The Dutch prime minister, Mark Rutte, is himself a former Unilever executive.

Now the company has a Scottish chief executive in Mr Jope, while Mr Andersen — who formerly headed the shipping group AP Moller-Maersk and brewer Carlsberg — is Danish.

Mr Jope has set a different tone. One top-30 investor said he “came across really well [in meetings] and the feedback from fund managers was overwhelmingly positive”.

The Dutch government remains a key stakeholder, however. But while saying it “regretted” Unilever’s move, it does not appear to be seeking to block it.

Unilever’s profitability has been improving

Unilever said it had made commitments to the Dutch including shifting some supply chain functions to Rotterdam from elsewhere in Europe. It has promised that if it lists its foods and refreshment division as an independent company, that will take place in the Netherlands.

With the UK currently retaining its trade and regulatory arrangements with the EU, Unilever can carry out the shift — structured as a merger in which each holder of a Dutch share will instead receive a newly issued UK share — in a relatively short time under the EU’s cross-border mergers regime.

Warren Ackerman, analyst at Barclays, said: “I think it will be rubber stamped quickly.”