WEEKLY COMMENTARY 2/20/17 – 2/26/17
There was no company news.
Founder-Led Companies Return Three Times S&P 500 Average (Mason Myer)
Mason Myer discusses how owner operators outperform the S&P 500. (link)
An HBR article from the Bain Consultant mentioned in the previous article. (link)
The original research paper by Purdue professors used in both articles. (link)
The $143bn flop: How Warren Buffett and 3G lost Unilever (CNBC)
FT looks at 3G’s failed bid of Unilever. (link) In the article, sources state Unilever thought the bid had no merit and thought a 3G takeover was the worst-case scenario as illustrated by following statement.
Another insider said: “When they put something on the table, Paul was just utterly categorical that there was no merit. He gave a number of reasons why there was no interest in such an offer.” The offer was rejected immediately.
Completely dismissing the bid without analyzing the proposal feels as if shareholders are irrelevant and an entrenched management team is worrying about their own positions. A FT article from 2010 echo’s this. (link)
Mr. Polman said: “I do not work for the shareholder, to be honest; I work for the consumer, the customer . . . I’m not driven and I don’t drive this business model by driving shareholder value.”
In 2016, FT published another interview with Mr. Polman. (link) If the link is behind a pay wall google “FT interview with Unilever.” The narrative is Mr. Polman is concerned about all stakeholders including shareholders. He has no concern for short-term oriented shareholders but long-term investors as his focus is the next 100 years. There are a number of other interviews with Mr. Polman essentially saying the same thing. This is another interview with The Guardian where he says shareholder value is not the most important focus. (link) Here is another recent interview with Fortune. (link) Unilever’s focus is the customer not the shareholder. The customer should be the focus when making products, but the company is owned by shareholders and management has a fiduciary duty to them.
Illustrated above is Unilever’s relative performance over the past five years. Unilever has the fourth lowest operating margin with the second highest capital efficiency leading to the third highest ROIC. Growth has slowed among all peers. Over the last five years, Unilever’s sales grew by 0.7%, its operating profit grew by 2.8%, and invested capital grew by 2.7%. The focus on the customers has not lead to drastic underperformance or outperformance.
Kraft Heinz bid $50 per share or €47.30 for all Unilever shares. The company has a strong competitive position with economies of scale being the biggest competitive driver along with customer captivity in the form of habit. ROIC also has very little dispersion making so it is a safe assumption that its average ROIC over the past five years will persist. The €47.30 bid placed Unilever’s market cap at €134.32 billion and an enterprise value at €146.26 billion. In 2016, the company generated €5.17 billion leading to a cash flow yield of 3.5%. Since 2012, the company grew its free cash flow at 3.8% per year creating a total return of 7.3%. Using a residual income model, a ROIC of 127% with a growth of 2.5%, similar to operating profit growth and invested capital growth over the past four years, and a discount rate of 10% into perpetuity, Unilever’s fair value is 26% below the offer price. Using a lower discount rate of 7.5% and the same profitability and growth assumptions, Unilever’s fair value is 10% above the offer price.
Kraft Heinz’s bid did not undervalue Unilever given its recent growth. Rejecting Kraft Heinz’s bid without analysis along with numerous management statements points to a management team at Unilever that are more concerned with the benefits of their position over focusing on shareholder value.
Shareowner’s Rights Across the Markets (CFA Institute)
A 2013 CFA Institute report on shareowner’s rights across markets (link)