Margins are not the be-all and end-all

HEADLINE news: “Bid assault on treasured brand by corporate giant”.

No, not Kraft Heinz’s move for Unilever last week, but Unilever’s own 1984 hostile approach for Brooke Bond, the maker of PG Tips tea. Those who live by the sword can also die by the sword.

Unilever’s iconic Marmite brand only came into the stable (alongside Hellmann’s mayonnaise) with the acquisition of Bestfoods in 2000, the same year as the company acquired Ben & Jerry’s ice cream. Radox arrived in 2010.

Corporate history is being rewritten constantly. There was obviously a huge kerfuffle at the end of last week when Kraft Heinz’s proposed $143 billion (£115 billion) acquisition of Unilever was forced into the open.

Yet, many individual shareholders were far from in celebratory mood. It wasn’t so much the miserly 18 per cent take-over premium on offer, more about the potential loss of an important component of share portfolios.

For long-term growth investors, there are a relatively limited number of companies that tick all the boxes of strong brands, decent growth, high and sustainable returns on capital and sensible management. However, there is no doubt that some sort of cat is out of the bag now. The Brazilian financiers behind 3G Capital, who along with Warren Buffett control almost half of Kraft Heinz, are renowned for playing a long game.

It is speculated that they really only want the Food business rather than Health & Personal Care. That makes some sense given what Kraft Heinz has already achieved since its own creation in 2015. The company has slashed costs.

Overall operating margin is 30 per cent, twice that of Unilever. The criticism of this business approach, though, is that it undermines innovation and marketing and therefore sales growth. A business model predicated almost entirely on margin enhancement through cost-cutting is going to run out of road eventually. That’s when a new victim has to be offered up for sacrifice on the altar of efficiency.

But, if Kraft Heinz returns to the fray, they must come up with the money. John Wyn-Evans is head of investment strategy at Investec Wealth & Investment