After The Kraft Heinz Deal Will Unilever plc Be Buffett’s Next Target?

Will Unilever plc (LON: ULVR) be Buffett’s next target?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The merger between two of the world’s largest food groups, Kraft and Heinz, funded in part by Warren Buffett, has created a media storm around the world.

And now, after this $46bn deal, there’s plenty of speculation about which company Warren Buffett’s Berkshire Hathaway conglomerate will pounce on next. 

Unfortunately, in its current form, Unilever (LSE: ULVR) is unlikely to attract Buffett’s billions, but the company would be attractive if it was broken up.

Worth more in bits

Unilever has four key business divisions. The largest, personal care, reported sales of €17.7bn for 2014 with an operating margin of 18.4%. Meanwhile, the company’s food division reported revenue of €12.4bn for 2014, with an operating margin of 29.2%. And the last two divisions, home care and refreshment both reported revenue of €9.2bn for 2014, and operating margins of 6.3% and 5.9% respectively. 

Buffett likes to maximise his returns and with this in mind, the only part of Unilever’s business that would be likely to attract his attention is the company’s food division.

You see, by combining Unilever’s global distribution network with that of Kraft and Heinz, Buffett and his partners would be able to reduce costs significantly and increase group-wide operating margins. This would maximise Buffett’s return on investment.

How much would it cost?

Buffett and his partners are paying around two-and-a-half times sales for Kraft. On that basis, Unilever’s food arm could be worth as much as €31bn, or just under £22.6bn. 

But it’s unlikely that Unilever will want to sell its food division any time soon. If any buyer wants to get their hands on it, they’ll have to buy the group as a whole.

This is not a totally unreasonable statement. Buying Unilever whole would cost around £91bn, assuming a price tag of two-and-a-half times sales.

Buying the group whole, cutting costs and then selling off the home care, personal care and refreshment divisions separately, could recoup the purchase cost.  

Should investors jump ship? 

Unilever is an attractive takeover target for one reason — it’s a great company. Unilever has been around for more than a century and the company is only getting better with age.

Indeed, despite Unilever’s size, City analysts expect the company’s earnings to continue to grow at a high single-digit rate for the next two years. What’s more, Unilever’s shares offer a dividend yield of 3.2% at present levels. Further, the payout is set to grow at an inflation busting 7% this year. 

However, due to Unilever’s impressive growth rate and the company’s defensive nature, investors are willing to pay a premium to get their hands on the stock. The company is currently trading at a forward P/E of 21.5, a price many investors believe is worth paying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »