Four years ago this month, Unilever (LSE: ULVR) rebuffed a Warren Buffett-backed bid for the company. The offer valued it at £40 a share. Subsequently, the Unilever share price went on to make an all-time high of £52 in the summer of 2019.
Today, I can buy Unilever’s shares at a lower price than Buffett was willing to pay. At sub-£40, they’re also at a 24% discount to their all-time high. Here, I’ll discuss why I’d buy the shares at this level. I’ll also look at the potential risks to my investment case.
Warren Buffett rebuffed
Kraft Heinz, backed by its 50% owners Buffett and 3G Capital, approached Unilever with an initial £40-a-share offer price. However, Unilever had no interest in being acquired.
According to the Financial Times, the Unilever team studied 3G’s modus operandi in previous takeovers, and concluded Kraft Heinz “would try to seem as friendly as possible and then increase its bid in increments until there was sufficient pressure from Unilever investors“.
This suggests Buffett would have been willing to sanction an offer of even more than £40-a-share. However, Unilever’s board moved quickly to nip Kraft Heinz’s approach in the bud. It publicly stated it saw no merit in the offer and no basis for any further discussions.
Buffett has an aversion to doing hostile takeovers, and he and 3G boss Jorge Lemann made the decision for Kraft Heinz to withdraw its proposal.
Unilever share price better than fair
One of Buffett’s famous sayings goes: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. That Kraft-Heinz’s £40-a-share approach for Unilever was an initial offer suggests to me sub-£40 a share represents a better than fair price for a wonderful company.
Buffett’s readiness to acquire Unilever for £40 a share, and possibly at a higher price, is one reason I’d be happy to buy the stock at its current level.
Historically cheap
I can see a couple of risks in buying Unilever based on the Buffett share price. First, his valuation of the company could have been wrong — that’s to say, too high.
It’s a risk. But I find it hard to believe Buffett, 3G’s Lemann, and the UK’s Nick Train (who was adding to his Unilever shareholding in 2017) were all significantly off the mark in their assessment of the intrinsic value of the business.
Another risk is that they were right, but Unilever has become intrinsically less valuable in the four years since. However, I can’t find see any evidence for this. It’s more profitable and cash-generative than in 2017.
Its underlying operating margin has expanded from 15.3% to 18.5% over the four years. Earnings per share have increased by 32% and free cash flow by 60%. I’d say Unilever is a more valuable business today than when Buffett placed his £40-a-share sighting shot on the company.
Trading at an historically cheap 18.4 times trailing earnings, with a free cash flow yield of 6.4% and dividend yield of 3.7%, I’d be happy to buy Unilever at its current share price.
