The Weekly - Takeover Rules, Love Them Or Hate Them?

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19/03/2018
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Unilever was founded in 1930 with the merger between a Dutch margarine producer, Margarine Unie, and the British soap maker, Lever Brothers. Today it is one of the largest consumer goods companies in the world, and it is home to over 400 brands such as: PG tips, Lynx, Persil and Ben & Jerry’s ice cream, to name but a few. For most of us we would struggle to perform a supermarket shop without placing a few of these products in our baskets!

Unilever made the news last week because instead of sharing its domicile between the UK and Netherlands it has decided to shift domicile completely to the Netherlands. Of course as news of this was announced the finger of blame was solely pointed at our decision to leave the European Union. However, Paul Polman, the chief executive of Unilever announced that this decision had absolutely nothing to do with Brexit. While probably not completely true, as every business decision being made at the moment will have to factor in any Brexit considerations, the chief executive said it was down to making the company more agile and flexible – business waffle at its finest.

It is easy to blame Brexit, especially as this wouldn’t be the first business decision Unilever has made where the finger was pointed at Brexit. I’m sure readers all remember #Marmitegate (Yes, we also denounce the use of hash tags and the use of the ‘gate’ suffix which is now used for every type of scandal), a standoff between Unilever for attempting to increase the price of its ‘love it or hate it’ spread and Tesco, who was refusing to stock it at a marked increase. The excuse Unilever gave was the fall of Sterling in the wake of the vote to leave the EU. This is despite both the source of the ingredients and the manufacturing process taking place in the UK. Unilever finally backed down and agreed not to raise the price and all those that ‘love it’ breathed a sigh of relief.

The truth is that behind Unilever’s decision there were probably two primary factors. The first being the falling power of brands. Unilever will only be too aware that supermarkets like Lidl and Aldi will stock fewer of their brands and will often offer consumers an alternative and similarly named product at a fraction of the price. In the current environment of rising inflation and stagnating wages many consumers have woken up to this fact, and when you realise Formil (Lidl own brand) does just as good a job as Persil at cleaning your clothes, but at half the price, it makes the switch away from brands for consumers not a difficult decision to make! This is also responsible for some of the woes being felt at the UK supermarkets. With Unilever establishing domicile in the Netherlands, it will make it easier to reorganise its brands; selling its less profitable brands and by investing in more profitable ones. Currently, under a shared domicile, it cannot exchange its shares in the Netherlands (about 55%) for those of its UK sibling (about 45%). While there will still be a UK listing, ownership will be entirety domiciled in the Netherlands thus allowing greater simplicity and flexibility to make strategic changes to its portfolio of brands. The good news here for existing UK investors in Unilever is that the exchange of shares from a PLC to a Dutch company structure will not be a taxable event. 

The second reason Unilever has perhaps decided to domicile completely in the Netherlands is to protect itself from a potentially hostile takeover. Last year Unilever managed to fend off a $143 billion offer from US based Kraft foods. By completely removing itself from the UK it is no longer subject to the UK takeover code and will be far more protected in the Netherlands. In the UK, rightly or wrongly, the only stakeholder that matters is the shareholder, however, in the Netherlands every stakeholder in the business matters. There has to be an employee consultation along with the trade unions providing the rationale for the takeover. Consequently, hostile or unsolicited offers have not been traditionally common in the Netherlands. It is likely these protections played a key reason why Unilever picked the Netherlands over the UK.

Brexit might not have been in the forefront of their decision making process, but the fact remains, as a large multinational company, why take the risk of relocating domicile to the UK when the details around Brexit are still increasingly hazy?  

While there are both positive and negatives in the openness in which the UK allows international business, perhaps a closer look does need to be made to our takeover rules post Brexit. While it is always important to seek international investment within the UK, it should not be to the detriment to the UK as a whole. Takeovers are part of the parcel of conducting business internationally, but consideration does need to be given to all stakeholders in the business and not just the quick buck that investors (some of which will be overseas) seek to make.

This will be increasingly important in a post Brexit world, and while we are no supporters of protectionism, there will be implications if large international businesses are able to snap up high quality UK businesses to the detriment of workers, taxpayers and communities. Companies particularly at risk are ones that derive most of their earnings overseas. While Sterling remains fairly weak against most of its international counterparts, as soon as there is some clarity of what the final Brexit deal will look like, it could bring in a new wave of takeover offers for British businesses.

A recent example of this would be Arm Holdings and its takeover by SoftBank Group, a Japanese holding company. Here was a brilliant British company whose chip designs can be found in almost every mobile phone on the planet. Can you imagine the US allowing a large overseas company to perform a raid on one of Silicon Valley’s stalwarts? Only last week Donald Trump blocked Broadcom’s proposed buyout of Qualcomm, on national security fears. This is a company that operates in the same field as Arm Holdings, but somehow we didn’t have any fears, security or otherwise on its proposed takeover?

We are not against the takeovers of British businesses.  However, with the rest of the world looking more inwards, perhaps we need to look at the ease with which overseas companies are able to acquire UK businesses and whether a takeover is in the best interests of all those concerned.

UK and US Stocks Close in Negative Territory

Equity market performance was mixed last week in a period of fairly muted volumes as investors consider overhanging political concerns, the renewed threat of global trade wars, plus heightened tensions between Russia and the West following the Salisbury chemical attack on a former Russian spy and his daughter. The FTSE 100 and the US S&P 500 were among the worst performing major markets, losing -0.8% and -1.2% respectively.

US losses were mediated by a modest rally on Friday which ended a four-day losing streak for the S&P 500. US industrial production data released on Friday showed an increase of +1.1% in February, its largest increase in four months.  A weather-related rebound in construction helped the data as well as a rise in output of oil and gas. Earlier in the week, economic data will have dampened sentiment as the US Commerce Department reported that retail sales declined -0.1% in February, well below the 0.3% rise many expected.

Sovereign bond yields edged lower over the week as inflation data failed to meet expectations on both sides of the Atlantic. The yield on 10-year US Treasuries slipped 5 basis points to 2.85% at Friday’s close.

There was little in the way of economic data releases in the UK as Chancellor Phillip Hammond delivered his Spring Statement. The Chancellor announced upward revisions to economic growth forecasts for 2018, up to 1.5% from 1.4%. In contrast, a report by the Organization for Economic Cooperation and Development (OECD) suggested Britain would miss out on much of the benefits of climbing global growth over the next two years due to ongoing Brexit negotiations. 

European markets finished the week in positive territory, albeit only just. Germany’s DAX 30 closed +0.4% higher whilst the French CAC 40 returned +0.2%. Stocks were buoyed by European Central Bank President Mario Draghi who reassured markets that the Bank would need more confidence that inflation was rising before bringing its quantitative easing programme to an end.

Better than expected Chinese industrial production data gave some support to commodity prices last week as both the price of oil and industrial metals such as Copper finished the week higher.

Week ahead

It’s a busy week for the central banks with the Bank of England, US Federal Reserve and the Bank of Japan hosting monetary policy meetings. No changes are expected from the Bank of England or the Bank of Japan with the Fed set to tighten again – a 25 basis points increase in the base rate to 1.75% is expected. Updated views on each of the three economies should be provided post meeting. In terms of data, it’s a particularly busy week on the domestic front with both unemployment and CPI inflation due over the next couple of days. Headline inflation is expected to have dropped by 20bps to 2.8% last month with unemployment likely to be unchanged at 4.4%. In the US, the latest durable goods orders data, which should provide an insight into the spending patterns of the country’s manufacturers, is released on Friday. The latest production indices (PMI’s) are out in the Eurozone later in the week although Japanese and Chinese data is in short supply.