Today we’re taking stock of a stock that we started covering not too long ago at the Lab, but since then we’ve seen some interesting developments in the ownership structure. Naturally, we are talking about Unilever PLC (NYSE: UL) (OTCPK:UNLYF) (OTCPK:UNLVF) and the arrival of activist investor Trian Fund Management, with outspoken founder Nelson Peltz.
News that the Trian chief had taken a seat on Unilever’s board of directors broke on May 31 and the share price immediately reacted with a +7% gain. The Peltz Group stake, which they formed this year, represents 1.5% of Unilever’s share capital and Unilever has announced that it will join as a non-executive director on July 20. In this article, we’ll take a look back at Trian’s history in the industry and what Peltz’s arrival on the board of the British-Dutch consumer goods giant could mean.
Who are they?
Trian Fund Management is by its own admission a “very committed shareholder, bringing a spirit of private equity to the public markets”. The Group seeks to “invest in high-quality but undervalued and underperforming public companies and work collaboratively with management teams and boards to help companies implement operational and strategic initiatives designed to generate growth sustainable long-term benefits for the benefit of all shareholders. Looking at their past and current investment portfolio, besides financiers and asset managers, we can see a plethora of consumer goods companies such as: PepsiCo (PEP), Cadbury’s, Kraft Heinz (KHC), Danone (OTCQX:DANOY), and especially in this case, Procter & Gamble (PG). As a direct competitor to Unilever, we’ll be looking at Trian’s past with P&G as an indicator of what might happen with Peltz on the Unilever board.
“High quality but undervalued” is what Trian is looking for. Unilever has come under fire from shareholders for its poor stock performance as well as an unsuccessful bid to buy the consumer healthcare division of GlaxoSmithKline (GSK). Under current CEO Alan Jope from January 2019, Unilever shares lost 12% compared to a FTSE 100 index return of 2% over the same period. Despite the lackluster performance, we at the Mare Evidence Lab are fans of Unilever, thanks to the strength of its brands and subsequently its pricing power, which showed in the first quarter of this year. Additionally, we view the stock as a key value play and noted a significant share buyback.
What can we expect?
Unilever Chairman Nils Andersen released the following statement after the announcement:
We are delighted to welcome Nelson to the Unilever Board. We have had extensive and constructive discussions with him and the Trian team and believe Nelson’s experience in the global consumer goods industry will be valuable to Unilever as we continue to drive our business performance. We look forward to working closely together to create long-term sustainable value for our shareholders and broader stakeholders.
Trian does not have a specific playbook and has adopted many strategies in the past; however, here at the Lab, we are placing inside bets on what Peltz might do: one of the possibilities we see is a Cadbury-Schweppes-style spin-off – where investors have championed the soft drink division spin-off to focus on the higher-margin gum and confectionery division (which also led to Kraft’s eventual takeover of Cadbury). This could make sense for Unilever as it has three key product groups in food, beauty and household products.
At Procter & Gamble, however, they did not take Peltz’s advice to split the business into separate units, but compared to Unilever, its product line is much more concentrated.
What does this mean for shareholders?
In addition to our internal assessment of the stock we gave a Buy rating to last month, we want to look at Trian’s past involvement in consumer goods or food companies and see what kind of performance they have achieved.
In these cases, we took the median prices of the months when Trian entered or exited the stock. Naturally, this relatively basic comparison only takes into account the appreciation of stocks and does not take into account the dividends these stocks pay. We remain confident in Trian’s ability to generate share price appreciation. Given the attractive dividend and the EV/EBITDA valuation discount compared to its peers, we maintain our buy rating.