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Executive Summary

Unilever is the world’s leading consumer good companies, which makes and sells over 400

brands across almost 195 countries. The company’s strategy involves the use of Sustainable

Living Plan (SLP) whereby the focus is not only on operating to enhance profitability and

add to shareholder wealth but also to have a positive impact on all the stakeholders by

operating sustainably.

The report provides Unilever with the analysis of three potential acquisition targets namely

Colgate-Palmolive, Fever-Tree and home/ hygiene division of Reckitt Benckiser.

The most suitable acquisition for Unilever is Colgate-Palmolive. This is because it

Allows Unilever CEO Polman to double the company’s revenue by 2024. Acquiring

Colgate-Palmolive is arguably the quickest way to help achieve this aim, as Unilever

would have access to the existing $16bn of revenues of Colgate-Palmolive, whilst

also devise strategies to grow the revenue further.

Greater exposure to the personal care segment, where Colgate-Palmolive has a strong

presence with the renowned brands such as Colgate, Palmolive, Sanex, Brite, Ajax

and Soupline. It enables Unilever to improve its existing profit margin in the personal

care segment, which are already the highest across all the four segments and >20%

The acquisition of Colgate-Palmolive allows Unilever to utilise its core competence in

terms of acquiring the renowned brands and using the strength of the brand along with

the integration capabilities to successfully integrate these brands into the overall

business.

The acquisition would be funded through combination of retained earnings, share issue and

debt. The new gearing (debt to total capital) is 69% compared to 61% before, which is not a

significant increase.

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Table of Contents

Executive Summary.................................................................................................................2

1. Introduction..........................................................................................................................4

2. Overview and financial analysis of Unilever.....................................................................4

2.1 Strategy...............................................................................................................................4

2.2 Market position..................................................................................................................4

2.3 Financial analysis...............................................................................................................5

3. Proposed growth and diversification strategy...................................................................9

4. Recommendations for acquisition....................................................................................13

References...............................................................................................................................16

Appendix 1: Unilever sustainable living plan......................................................................17

Appendix 2: Income statement.............................................................................................18

Appendix 3: Statement of financial position........................................................................19

Appendix 4: Cash flow statement.........................................................................................20

Appendix 5: Statement of changes in equity.......................................................................21

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1. Introduction

The report provides Unilever with the analysis of three potential acquisition targets namely

Colgate-Palmolive, Fever-Tree and home/ hygiene division of Reckitt Benckiser. The

rationale for acquisition of each of these is discussed including the review of capital structure

of Unilever to propose an acquisition most suitable for Unilever based on its vision and long-

term strategic objectives.

2. Overview and financial analysis of Unilever

2.1 Strategy

Unilever is the world’s leading consumer good companies, which makes and sells over 400

brands across almost 195 countries. The company’s strategy involves the use of Sustainable

Living Plan (SLP) whereby the focus is not only on operating to enhance profitability and

add to shareholder wealth but also to have a positive impact on all the stakeholders by

operating sustainably. As part of SLP, Unilever focuses on the following:

Growing the business including sales, margins and capital efficiency

Improving health and wellbeing of customers

Enhancing livelihoods of employees and suppliers

Reducing the environmental impact

The progress on each of these aspects over the period 2015-2017 is contained in appendix 1.

2.2 Market position

Unilever operates in the fast moving consumer goods (FMCG) industry and competes with a

number of large firms. The size of Unilever and competitor firms as measured by revenue is

provided in figure 1, which shows that in revenue terms, Nestle is the largest company

followed by Johnson & Johnson and then P&G and Unilever. The global presence of these

four brands in the FMCG industry means the industry structure is oligopolistic, where firms

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compete on the basis of price (charging lower price) as well as non-price competition through

differentiating their products (via product quality and branding) (OFCOM, 2017).

Figure 1: Size of Unilever and competitor firms

Source: Prepared using Bloomberg and company annual reports

2.3 Financial analysis

The analysis of profitability of Unilever over the 2015-2017 period shows the company has

been able to successfully increase its gross margin. This is a result of SLP, superior product

quality and strong branding, which have enabled the company to charge premium prices

(Unilever annual report, 2017).

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Figure 2: Gross profit margin of Unilever

Source: Unilever annual report (2017)

As with the gross profit margin, the EBIDA and EBIT margins have also improved over time.

This is shown in figure 3, which highlights the success of Unilever’s SLP strategy whereby

the company is focused on providing high quality and healthy products to its customers,

whilst enhancing the capital and operational efficiency.

Figure 3: EBITDA and EBIT margins of Unilever

Source: Unilever annual report (2017)

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One potential area of concern for Unilever is the slowdown in revenue growth, as figure 4

shows that revenue growth has slowed down from 10% in 2015 to 2.5% in 2017. This is

mainly a result of slowing down of the consumer spending on emerging market economies,

which account for 58% of Unilever’s total revenue (Unilever annual report, 2017). This

highlights the need for Unilever to acquire a suitable business in the future, which would

allow the company to increase its revenue growth whilst also successfully improving the

operating profit margin through integrating the business, realising the synergies, economies

of scale and scope.

Figure 4: Revenue growth of Unilever

Source: Unilever annual report (2017)

The review of capital structure shows that gearing (debt as a proportion of total capital) has

increased slightly from 52% in 2015 to 61% in 2017 (figure 5). A key reason for this increase

is issuance of new bonds, which increased the non-current liabilities during 2017 (See figure

5.1 for breakdown of Unilever’s financial liabilities as provided in Note 15 to the financial

statements in 2017 annual report). However, the increase in gearing is not a cause for

concern, as an increase in profitability of Unilever over the last three years has improved the

interest coverage, despite the increase in gearing (figure 6). It shows the company can

comfortably meet its interest payments on debt, given the increase in profit earned over time.

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Figure 5: Unilever gearing

Source: Unilever annual report (2017)

Figure 5.1: Breakdown of financial liabilities of Unilever

Source: Unilever annual report (2017, p. 119)

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Figure 6: Unilever interest coverage

Source: Unilever annual report (2017)

Note: The financial statements used for the purposes of calculations are provided in

appendices 2-5.

3. Proposed growth and diversification strategy

Unilever profit margins remain high in the personal care and foods segment, as shown in

figure 7. However, an area of concern for the business in 2017 has been the slowdown in its

food sales, as revenue growth has remained between 0-1% (figure 7 and 8). To achieve

growth in revenues and to enhance the overall profit margin of the business, acquisition

within either personal care or foods segment is justified. This is because acquiring an

established brand experiencing rapid revenue growth in these segments would not only allow

Unilever to improve its revenue growth but also improve the operating and net profit margin

of the business.

Thus, the rationale for acquisition is to focus on high profit margin businesses that would

improve the revenue growth of Unilever, whilst also allowing the company a possibility to

attain synergies and economies of scale to boost its overall profit margin.

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Figure 7: Revenue growth and profit margins across the four divisions of Unilever namely

personal care, home care, foods and refreshment

Source: Unilever annual report (2017, p. 6)

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Figure 8: Revenue growth across the four segments of Unilever between 2015 and 2017

Source: Bloomberg (2018)

The three different M&A options for Unilever are analysed below.

Colgate-Palmolive

The rationale for acquisition of Colgate-Palmolive is that it would help Unilever to gain

further exposure to the emerging market economies to drive future revenue growth, whilst

also allowing Unilever to increase its exposure to the Personal care segment, which has the

highest profit margins (see figure 7).

The personal care market segment is the second fastest growing at Unilever after Homecare,

and acquisition of popular brands of Colgate-Palmolive such as Colgate, Palmolive, Sanex,

Brite, Ajax and Soupline would increase the brand strength of Unilever further, allowing the

company to charge premium prices and increase its overall profit margins.

As Unilever CEO Polman aims to double the company’s revenue by 2024, acquiring Colgate-

Palmolive is arguably the quickest way to help achieve this aim, as Unilever would have

access to the existing $16bn of revenues of Colgate-Palmolive (Colgate-Palmolive annual

report, 2017), whilst also devise strategies to grow the revenue further. Thus, acquisition of

Colgate-Palmolive would help the company to increase its portfolio shift towards personal

care segment, increase the geographical presence in the emerging markets and North

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America, resulting in greater geographical diversification and reduced reliance on European

market.

Fever-Tree

The company has enjoyed significant growth in tis drinks business since listing on the stock

exchange in 2014. The company’s drink brands have enjoyed strength, as it is considered a

premium gin tonic brand, which has a stable demand (Fever-Tree annual report, 2018). The

presence of Fever-Tree across 10 different countries also adds to the geographical

diversification for Unilever and most importantly, its high EBIDA margin along with the

revenue growth (72% revenue growth in 2017) (Fever-Tree annual report, 2018) enable

Unilever to improve its own profit margins whilst adding to the revenue growth in the foods

segment through undertaking this horizontal acquisition.

As Unilever already owns popular drink brands (e.g. Lipton and PG Tips), it implies the

company has expertise in terms of human resources to successfully undertake the marketing

and integration of Fever-Tree into the overall Unilever brand. It would help to achieve

integration between the brands, promoting the synergies and operational efficiency of the

overall business.

Home/ hygiene division of Reckitt Benckiser

There are several arguments for acquisition of home/ hygiene division of Reckitt, which is a

horizontal acquisition. Given the highest revenue growth in Unilever’s home care division

and the fact that since 2015, Unilever has spent EUR10bn on 20 different acquisitions, the

true strength of Unilever lies in its ability to scale up the proven brands and business models

by using its global presence and available resources (e.g. technological, financial and human

resource infrastructure) (Ackerman, 2018).

As Reckitt has recently restructured its business operations by separating consumer health

(personal care) and home/hygiene businesses, there is a possibility for Unilever to acquire the

home/hygiene division of Reckitt without paying a significant premium, as Reckitt

management consider the home/hygiene division as non-core (Ackerman, 2018). The

acquisition would help add Vanish to the existing laundry portfolio of Unilever, whilst also

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allowing Unilever to benefit from the brands such as Harpic, AirWick and Finish which are

all scalable brands.

4. Recommendations for acquisition

Based on the review of three options in section 3, the most suitable acquisition for Unilever is

Colgate-Palmolive. The four reasons that serve as the basis of this recommendation are

provided below:

It allows Unilever CEO Polman to double the company’s revenue by 2024 through

undertaking a horizontal acquisition (acquisition of a company in the same industry

and stage of production). Acquiring Colgate-Palmolive is arguably the quickest way

to help achieve this aim, as Unilever would have access to the existing $16bn of

revenues of Colgate-Palmolive, whilst also devise strategies to grow the revenue

further.

Reduce the reliance on European market whilst strengthening the exposure to the fast-

growing Asian markets further as well as North American market where Colgate-

Palmolive has a strong presence

Greater exposure to the personal care segment, where Colgate-Palmolive has a strong

presence with the renowned brands such as Colgate, Palmolive, Sanex, Brite, Ajax

and Soupline. It enables Unilever to improve its existing profit margin in the personal

care segment, which are already the highest across all the four segments and >20%

The acquisition of Colgate-Palmolive allows Unilever to utilise its core competence in

terms of acquiring the renowned brands and using the strength of the brand along with

the integration capabilities to successfully integrate these brands into the overall

business. Ultimately, Unilever can further scale the brands such as Colgate,

Palmolive, Sanex, Brite, Ajax and Soupline

The existing capital structure shows the company’s gearing (debt to total capital) is 61%

(figure 5). The existing market capitalisation of Colgate-Palmolive is $53.9bn and the

company’s value has not increased over the last 5-year period (figure 9). Considering the

average premium paid in FMCG industry of 22% (AT Kearney, 2018), this amounts to a

potential acquisition price of $66bn (£52bn or EUR57bn based on today’s exchange rate)

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Figure 9: Share price of Colgate-Palmolive over the period 2013-2018

Source: Google Finance

To fund the proposed expansion, Unilever can raise new equity (rights issue or new issue)

equivalent to EUR20bn. In addition, the retained profit of Unilever in 2017 was EUR26.5bn

of which, EUR20bn can be used, which still leaves EUR6.5bn to continue to meet the

dividend payments over the next two years. The balance EUR17bn can be raised through

issuance of long-term bonds. The long-term bonds (e.g. 10-year bonds) are preferred, as

central banks (especially Federal Reserve and Bank of England) have started to increase the

interest rate, which means issuance of long-dated bonds at the current low rates is preferred to

lock-in the fixed coupon payments.

The new capital structure would include total equity of EUR15bn (as issuance of equity

would increase the equity by EUR20bn but using retained profit would reduce the equity by

the same amount) whereas the total long-term liabilities would be EUR33bn (an increase of

EUR17bn). The new gearing (debt to total capital) is 69% compared to 61% before, which is

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not a significant increase. In addition, the interest coverage would only reduce marginally in

the first year, which is followed be an increase in interest coverage from second year

onwards, as the expected synergies of EUR4bn would increase the operating profit of

Unilever. This shows the acquisition is likely to be accretive to the shareholders of Unilever,

as earnings per share would increase.

Although the shareholders of Colgate-Palmolive could be receptive however, the premium of

22% along with the lack of return for shareholders of Colgate-Palmolive over the last 5-year

period means it is highly likely that board would recommend the acquisition to proceed.

In terms of regulatory approval, Competition and Markets Authority (CMA) would

investigate the merger, as the UK turnover would exceed £70m. However, the second

condition that market share in the industry in UK should not exceed 25% is unlikely to be

fulfilled (Reuters, 2017), given the considerable market share enjoyed by other brands in the

FMCG industry in the UK (e.g. Nestle, Proctor & Gamble, Reckitt and Johnson & Johnson).

Therefore, it is likely that CMA would permit the proposed acquisition to proceed.

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References

Ackerman, W. (2018), Seismic fmcg portfolio shifts loom in 2018, available at:

https://www.thegrocer.co.uk/finance/mergers-and-acquisitions/seismic-fmcg-portfolio-shifts-

loom-in-2018/562248.article

AT Kearney (2018), 2018 Consumer and Retail M&A Report, available at:

https://www.atkearney.com/retail/consumer-and-retail-m-a-2018

Bloomberg (2018), Unilever's Big Move Looks a Lot Like Prep for Prime M&A, available at:

https://www.bloomberg.com/opinion/articles/2018-03-15/unilever-s-big-move-looks-a-lot-

like-prep-for-prime-m-a

Colgate-Palmolive annual report (2017), available at

http://investor.colgatepalmolive.com/financial-information/annual-reports

Fever-Tree annual report (2018), available at:

https://fever-tree.com/en_GB/investors-results-and-reports

OFCOM (2017), available at:

https://www.ofcom.org.uk/__data/assets/pdf_file/0017/102527/Summary-of-oligopolies-

roundtable-8-February-2017.pdf

Reuters (2017), Merger control in the UK (England and Wales): overview, available at:

https://uk.practicallaw.thomsonreuters.com/0-500-7317?

transitionType=Default&contextData=(sc.Default)

Unilever annual report, (2017), available at:

https://www.unilever.com/Images/unilever-annual-report-and-accounts-2017_tcm244-

516456_en.pdf

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Appendix 1: Unilever sustainable living plan

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Appendix 2: Income statement

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Appendix 3: Statement of financial position

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Appendix 4: Cash flow statement

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Appendix 5: Statement of changes in equity

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