(CPG Brain) Unilever: the battle of Unilever 2021/22 is over but the war has begun.

 

It’s over! The great Unilever shareholder rebellion or 2021/22 has come to an end after CEO Alan Jope listened (read got his arm twisted) to his shareholders and announced Unilever will not pursue further M&A along with a massive 3bn share buyback program and 1500 in job cuts. 

We thought the company was moving too fast into consumer health but how quick they drooped their plans under shareholder pressure was a relief but also a little concerning (more on that later)

This is a major win for shareholders stopping the company’s management making an expensive pivot to consumer health largely in reaction to rising production costs and COVID-19 related supply chain disruption. Management plans to pivot to consumer health would see Unilever almost certainly take on more debt which bad for shareholders as it muddies Unilever’s strong balance sheet and may eventually see the company announce a dividend cut. Add to that the company potentially risking a credit downgrade as rating shop deem its pivot too risky, shareholders were well in their rights to put a kibosh on management’s consumer health push 

We were of the opinion that Unilever consumer health push made sense as inflation continues to stretch whatever pricing power Unilever brands have to its limits. But upon further reflection, while the consumer health business is a better business than its food brands, shareholders were under the impression that management was changing course not to move into a better business but to escape a challenging macro environment of a slow growth business that’s still cash flow accretive. Needless to say, management pivoting away from a cash accretive business no matter how much macro level pressure is crushing it is a big no no for shareholders. 

While we still think Unilever moving into consumer health isn’t a bad one, it reeks of management somehow not knowing what kind of business they’re running or at the very least what kind of business they think their shareholders are backing. A pivot to consumer health makes sense but with a business of Unilever’s size and solid performance making such a big move with the very real possibility that it might not work as hoped gives us pause. Unilever shareholders, for the most part, are positioned in the company for strong cash flows and dividend yield, not an expensive tilt into a business driven by macro level pressure caused ongoing black swan events.

It's been known for management and shareholders to clash over capital allocation decisions but this clash was especially interesting because the undercurrent of the revolt isn’t so much Unilever’s performance but the company ethical ambitions. Unilever has gotten into trouble before over its ethical ambitions but of late these stances has seen it wade into issues even the most firebrand politician won’t touch. Companies pull out of markets all the time but when Unilever brand Ben and Jerry’s (B&J) exited the occupied territories, it created a storm of controversy drawing criticism from US senators and Israel’s prime minster. The company also saw pressure as US state funds pulled their position in the Anglo Dutch company but the pain, unfortunately for Unilever isn’t over as Ben and Jerry once again waded into another delicate conflict: the impending Russian invasion of Ukraine. 

 

Calls for, in the words of marketer Mark Ritson to “kill their brand” (that brand being Ben and Jerry’s) has been getting louder as the brands history of political activism keeps dragging its parent into one political third rail after another. Unilever, telling from Jope’s public statement about B&J’s tweet, have reach their threshold of tolerance Jope advised the company stay away from subjects where it has no “expertise or credibility”(ouch!). 

That said, Unilever also reiterated its commitment to the ice cream business despite international crap storm caused by its premier brand in that division. However, given how deep activist investors are digging their claws into the company, what’s the odds on the concessions stopping at large buybacks and redundancies. Activist investors aren’t all that bad but activist investors being able to influence a firm’s capital allocation decisions is worrying as their capital allocation strategy could be worse than those proposed by management (just ask blockbuster). 

In sum, Unilever rolling back it’s pivot to consumer health is a victory for shareholders but whether that is a good thing for Unilever remains to be seen.