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New Unilever CEO faces a tricky path to ride

Alan Jope will be measured by investors on his vision for the consumer goods group and how successfully he implements it

Unilever building in London. The firm's new CEO faces some challenges. Reuters
Unilever building in London. The firm's new CEO faces some challenges. Reuters

Alan Jope told a podcast in 2016 that he didn’t define himself by his work; family, football and motorcycling were just as important.

Having taken over as chief executive of Unilever on January 1, investors are unlikely to see it that way. They will measure him on his vision for the consumer goods group and how successfully he implements it.

Mr Jope succeeds Paul Polman, who ran the consumer goods giant for a decade. Although shareholder returns were impressive during his tenure, the Dutch grandee divided investors almost as much as the company’s Marmite brand. His successor has the opportunity to solve what seems to have become an intractable problem: despite its enviable scale and penetration of vibrant emerging markets, Unilever has failed to turbo-charge sales.

To achieve this the new CEO will need as many options as possible, including the ability to execute canny deals. This will require simplifying Unilever’s cumbersome corporate structure.

He hasn’t started well. Just one week after his intitial appointment, he told investors there was “no chance of us backing down” on his predecessor’s goal of lifting the underlying operating margin to 20 per cent by 2020, while delivering annual revenue growth of between 3 per cent and 5 per cent. This is a missed opportunity. Mr Jope could have revised the targets, or at least given himself more time to assess them.

That could prove a costly misjudgement. Unilever has made good progress in lifting the margin. But boosting revenue looks more challenging, and the company looks set to be closer to the bottom end of its forecast range this year. A miss here would be sure to provoke investor ire.

That won’t help him build any bridges with UK shareholders. While the stock is not too far from its record high, some of them were angered by the plan to simplify the group’s dual listing into a single company in the Netherlands. They launched an aggressive campaign, and at the eleventh hour, Unilever backed down.

Here Mr Jope has a good chance of success. Not only is he British - it would have been difficult to convince investors to support both a Dutch chairman and CEO after the revolt - his willingness to do punishing burpees on the Spartan UP! motivation podcast shows he’s pretty affable and up for a challenge.

He’ll have to turn on all his Glaswegian charm to get them onside, because he’ll need their support as he decides on Unilever’s broader strategy.

Mr Jope’s background was most recently running the faster-growing beauty and personal care division. This is useful, given the need to reorient the group towards businesses most capable of elevating revenue.

The logical way to achieve this is to concentrate on his old stomping grounds, as well as the home arms, and split off food and refreshments. The latter could have an enterprise value of about €55 billion (Dh232.12bn), according to analysts at UBS, assuming a 15 per cent premium for Unilever’s strong emerging market exposure.

That would also provide firepower for acquisitions, such as Reckitt Benckiser’s hygiene and home business, which analysts at Jefferies estimate could be valued at about £20bn (Dh93.7bn), assuming a 25 per cent takeover premium. Another option could be purchasing Colgate-Palmolive, which has an enterprise value of about $60bn.

But a new CEO wants to have as many options as possible. And that’s where the continued existence of both the British and Dutch companies, each with their own class of shares, could be a handicap.

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There is nothing to stop Unilever selling off food for cash, as it did with its spreads business. But after that it gets trickier. Having two classes of shares not only makes it more difficult to demerge this division, it also complicates any attempt to use the stock as an acquisition currency for a big US takeover.

So Mr Jope needs to finish what Mr Polman started on both strategy and the structure of the parent company.

When it comes to the latter, there are no easy answers. But to maximise success, Unilever will have to endure the pain either from compensating any UK shareholders that would have to give up their holdings, or concocting a hybrid of the Dutch and British entities. Getting to a mix of the two regimes is likely to be a long and arduous task, and still might not deliver an optimal solution.

This is where Mr Jope’s hasty approach to Mr Polman’s targets hits home. Amid this change, he’ll have little choice but to deliver on them. And he may not have all the time in the world. Though Kraft Heinz looks unlikely to repeat its 2017 approach, given that its own troubles have left its market capitalisation at less than half of Unilever’s, a lurch downwards in performance could still attract the interest of an activist investor. After all, not all of them are interested in showy break-ups - Elliott Management is seeking a better performance at Pernod Ricard. Unilever could be vulnerable to just an intervention.

Mr Jope is fond of off-road motorcycling in the likes of Mongolia and Namibia. He will need all of his endurance skills to get to grips with the knotty problems he has inherited.

Bloomberg

Updated: January 3, 2019 05:57 PM

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