Love it or hate it? Unilever eats its words to halt Marmite move
Unilever claimed that many of its shareholders loved the prospect of it abandoning its 88-year, Anglo-dutch, dualheaded structure because it would make the company more strategically nimble. But in recent days there has been a parade of fund managers lining up to say they hated it. Whether it’s making savoury spreads or trying to go Dutch, the company seems to have a particular genius for dividing opinion.
The possibility of Unilever not getting the necessary 75pc of UK shares to vote in favour of the move at the emergency general meeting later this month was starting to loom large. The subsequent reverse-ferret is far from dignified but probably the least bad option in the circumstances. How did the Unilever – or should that be Uniremainer? – get itself into such a humiliating position?
It is fair to say that, were you starting with a blank sheet of paper, you wouldn’t come up with Unilever’s existing corporate structure. For historic reasons it has two holding companies – Unilever plc and Unilever NV – each with their own listings in London and Amsterdam respectively. The company’s board decided that this was too complicated and hampered its room for manoeuvre. If Unilever wanted to make a big acquisition, for example, it couldn’t easily use its shares as currency and would have to stump up hard cash. The board’s solution was to create a single holding company, headquartered in the Netherlands, with a single class of shares listed in Amsterdam, London and New York.
All sensible stuff. Unfortunately there were some pretty hefty snags. The biggest of this was the fact that the next structure would result in Unilever being kicked out of the FTSE 100 index of the UK’S leading shares. This would, in effect, force the funds that have a specific mandate to track that index to sell their shares (we could have a discussion about whether investors should be tying one hand behind their back in this manner – but that’s a topic for another day).
This is no small thing. Unilever was saying that the new structure would benefit the company – by giving it more strategic options and potentially reducing its cost of capital – but effectively excluding some of its owners from sharing in those benefits.
Investors buy equity in a company, and face the possibility of losing all their money, for the opportunity to share in future profits and growth. Strip them of that opportunity, and they deserve some form of compensation. Hence why companies have to pay a premium over the market price for the companies that they acquire. As has been repeatedly pointed out this week, some of Unilever’s shareholders were effectively being asked to agree to a takeover without a premium being paid. Viewed in this light, it is no wonder that so many were so upset.
What’s more, there was a definite sense that the stated reasons for the restructuring were by no means the only ones. Was it a mere coincidence that the somewhat more protectionist regime in the Netherlands started to look increasingly appealing to Unilever so soon after it received a hostile bid from Kraft Heinz and so close to the UK’S departure from the European Union?
Paul Polman, Unilever’s chief executive, made no secret of his support for Remain. That said, Brexit is more likely to have an impact on Unilever’s operating business than the holding company and, even had the restructuring gone ahead, two-thirds of its business would still have been run out of the UK.
The suggestion that it would be easier to keep the corporate barbarians from the gate in Rotterdam than London is harder to refute. If Unilever merely wanted to simplify its corporate structure, why not pick London, as Relx, another Anglo-dutch company, recently did? The market is deeper and more liquid on the LSE than the Amsterdam Stock Exchange and the UK is, as previously mentioned, the country from which most of Unilever’s businesses are run.
Clearly Unilever’s management team has questions to answer. They said the move would have made the company “stronger, simpler … more competitive [and] better positioned for long-term success”.
Logic dictates that, following the abandonment of its plan, the company is now weaker, more complicated, less competitive and worse positioned for long-term success than it otherwise would have been. If, as the company said, lots of shareholders supported the move, they’re hardly going to be best pleased about the U-turn. How will they be placated?
There would appear to be two options.
The first is that the company says that the restructuring was flawed not only in execution but also in conception and carries on as before. The trouble with this course of action is that it probably means that the chief executive and/or the chairman are toast. It is widely assumed that Polman, who already has one foot out the door, was the brains behind the move. But Marijn Dekkers, the chairman, spearheaded the aborted campaign to win shareholder approval. Who will carry the can?
The second option is that Unilever holds its hands up to trying to bulldoze shareholders but doubles down on its belief that the corporate structure needs to be fixed.
If it goes down this route it will have to work much harder at taking shareholders with it. One way would be to pick London as the HQ for the unified holding company, thereby putting to bed any suggestion that Unilever is fleeing from Brexit or nasty corporate raiders.
More importantly, it would also have to acknowledge that some investors – either in London or the Netherlands – would become forced sellers when the company adopted a single class of shares and offer them a premium. It will of course be tricky to work out what the premium is and structure it in a way that doesn’t annoy the remaining investors. But that’s why investment bankers earn the big bucks, right?
Whether this can be done by the current chief executive and chairman remains to be seen. They have just demonstrated that winning round shareholders is not their forte.
Shareholders were effectively being asked to agree to a takeover without a premium being paid