Fool's Eye View

[ May 3, 2000 ]

Unilever Gets Greedy

By Stuart Watson (TMF Tiger)

Great Titchfield Street, London -- Anyone who follows our Qualiport portfolio will know the story of Unilever (LSE: ULVR) pretty much off by heart by now. It is the world's second largest food company and is in the early stages of a long-term restructuring plan. Unilever intends to drive up its profit margins from their current level of just over 10% to 15% in the next five years by trimming its smaller brands and concentrating its efforts on its 'power brands'. As part of this process it is also making selective acquisitions. Unilever recently bought Ben & Jerry's ice cream and SlimFast for a combined total of £1.7b. Having taken these small bites, Unilever is now looking for bigger fish.

After the close of trading yesterday it was revealed that Unilever has approached Bestfoods (NYSE: BFO) offering $66 in cash for each of its shares. This offer values the US group at £11.8b. Bestfoods is much more of a global player than many other US food companies. About two-thirds of its sales are outside the US. It has some well-known brands including Knorr, Mazola and Hellmanns. But Bestfoods have decided that they don't want to play ball and have rejected Unilever's bid saying "it is not opportune to consider a sale of the company".

First of all I'd be wary of any company that chooses to dress up its statements with silly words like opportune. Secondly Bestfoods seems to have had a change of heart. They were believed to be merger discussions with HJ Heinz (NYSE: HNZ) back in November. The offer price of $66 looks reasonably generous. It is equivalent to 24 times Bestfoods' forecast profits for this year. Unilever itself is trading on a measly rating by comparison, just 13 times estimated profits for this year.

Bestfoods very much looks and smells like a mini-Unilever. The two companies look as if they would be a good fit. But like Unilever, Bestfoods is also struggling to grow its sales, despite its claims of being a growth company. Over the last two years it has only managed to increase sales from £5.4b to £5.5b. Its profits have increased at a greater rate as it has been successful in driving up its profit margins. Currently they are 12.7%, significantly higher than Unilever's and suggesting that there may not be a huge amount of costs that can be eliminated via a merger. To be fair Bestfoods is growing faster than its peers but that is because they are hardly growing at all. In fact the whole food sector seems ripe for consolidation at the moment. Nabisco Group (NYSE: NGH) has also said it was open to offers.

On balance Unilever looks as if it would be a better investment were it to take over Bestfoods but the underlying problem of low growth still remains. Over the long term it is difficult to see Unilever doing that much better than a plain old index tracker.

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