31st March 2017 Cautiousness first Fair Value …...Unilever 3 1. Genesis On February 17th, Kraft-Heinz and Unilever confirmed the approach after FT Alphaville reporters, in their

r r

INDEPENDENT RESEARCH UPDATE Unilever

31st March 2017 Cautiousness first

Food & Beverages Fair Value EUR44 (price EUR46.80) NEUTRAL

Bloomberg UNA NA

Reuters UNc.AS

12-month High / Low (EUR) 46.8 / 36.4

Market capitalisation (EURm) 117,894

Enterprise Value (BG estimates EURm) 128,314

Avg. 6m daily volume ('000 shares) 4 476

Free Float 100%

3y EPS CAGR 9.4%

Dividend yield (12/17e) 2.95%

UK takeover rules mean Kraft Heinz is blocked from making another

bid for Unilever for six months after withdrawing its initial attempt. The

most important question is: will the US company return at the end of this

period? We do not think so. The fact that the bid was rejected with such

ease suggests that Kraft-Heinz made a hasty decision. But this does not

mean Unilever is not in play mode. Unilever’s share price is now 18%

above the pre-offer level, which means the group is under pressure to

meet investor expectations. The group is conducting a review, the results

of which will be announced at the beginning of April.

We think the company will choose the most cautious options, which are

increasing returns to shareholders (buybacks) and cost savings. Why?

Two reasons: 1/ there is no need for Unilever to change its entire

strategy simply because Kraft-Heinz made an attempt and 2/ Unilever is

not an underperformer with a TSR of 194% over the past eight years vs

137% for the Stoxx Europe 600. The ideas of splitting food and HPC,

disposing of the entire food business or undertaking wide-scale M&A

seem overly aggressive to us. However, we are not ruling out the

prospect of the group deciding to sell its BCS unit, probably as part of a

buyback programme.

If we are right, this would increase our FV from EUR44 to EUR49.5,

implying upside potential of only 6%. This means the positive news we

expect the group to announce is already partly factored into the share

price while any disappointment could have a very detrimental impact for

the performance, especially since Q1 2017 should be very soft. Like its

peers, Unilever is expected to be impacted by the leap year and the late

timing of Easter. This should have a negative technical effect of -100bps

and -50bps. The slowdown in Brazil, the demonetisation in India,

political uncertainty and delays in tax returns in the US should also be

penalising. Our estimate is for 1% organic sales growth in Q1 vs +3.5%

in 2017.

YE December 12/16 12/17e 12/18e 12/19e

Revenue (EURm) 52,713 55,580 57,884 60,657

EBIT (EURm) 8,046 8,929 9,568 10,317

Basic EPS (EUR) 1.89 2.10 2.27 2.47

Diluted EPS (EUR) 1.88 2.09 2.26 2.46

P/E 24.9x 22.4x 20.7x 19.0x

ROCE 17.9 19.0 20.5 22.1

29.7

31.7

33.7

35.7

37.7

39.7

41.7

43.7

45.7

47.7

30/09/15 31/12/15 31/03/16 30/06/16 30/09/16 31/12/16

UNILEVER DR SXX EUROPE 600

Analyst: Sector Analyst Team:

Virginie Roumage Nikolaas Faes

33(0) 1.56.68.75.22 Loïc Morvan

[email protected] Antoine Parison

Cédric Rossi

Unilever

2

Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e

Revenues 48,436 53,272 52,713 55,580 57,884 60,657

Reported change (%) -2.7% 10.0% -1.0% 5.4% 4.1% 4.8%

Organic change (%) 2.9% 4.1% 3.7% 3.5% 4.1% 4.8%

Adjusted EBITDA 8,147 9,235 9,417 10,374 11,073 11,894

EBIT 7,020 7,865 8,046 8,929 9,568 10,317

Change (%) 0.1% 12.0% 2.3% 11.0% 7.2% 7.8%

Financial results (477) (493) (563) (530) (495) (460)

Profits from associates 143 198 231 188 195 202

Pre-Tax profits 7,646 7,220 7,469 8,587 9,268 10,059

Tax (2,131) (1,961) (1,922) (2,220) (2,397) (2,602)

Minority interests 344 350 363 400 420 434

Net profit _ group share 5,171 4,909 5,184 5,967 6,452 7,023

Restated net profit 4,634 5,210 5,370 5,967 6,452 7,023

Change (%) 0.6% 12.4% 3.1% 11.1% 8.1% 8.9%

Cash Flow Statement (EURm)

Operating cash flows 7,854 9,351 9,298 10,424 11,034 11,845

Change in working capital 8.0 720 51.0 114 24.9 14.3

Capex, net (2,045) (2,074) (1,878) (1,945) (2,026) (2,123)

Financial investments, net (398) (460) (367) (400) (400) (399)

Dividends (3,189) (3,331) (3,609) (3,656) (3,949) (4,264)

Other (1,444) (1,605) (61,109) 0.0 0.0 0.0

Net debt (9,900) (11,505) (12,614) (10,420) (8,045) (5,466)

Free Cash flow 3,100 4,796 4,802 5,859 6,212 6,720

Balance Sheet (EURm)

Tangible fixed assets 10,472 11,058 11,673 10,636 9,504 8,259

Intangibles assets 22,174 25,059 27,433 28,530 29,672 30,858

Cash & equivalents 2,151 2,302 3,382 1,135 3,025 4,342

current assets 10,196 10,384 10,502 11,321 11,947 12,770

Other assets 3,034 3,495 3,439 3,577 3,720 3,868

Total assets 48,027 52,298 56,429 55,199 57,868 60,098

L & ST Debt 12,722 14,643 16,595 12,335 11,968 10,835

Others liabilities 21,042 21,573 22,854 23,567 24,093 24,692

Shareholders' funds 13,651 15,439 16,354 18,665 21,168 23,927

Total Liabilities 33,764 36,216 39,449 35,902 36,061 35,526

Capital employed 29,237 31,468 34,615 34,562 34,545 34,474

Ratios

Operating margin 14.49 14.76 15.26 16.06 16.53 17.01

Tax rate (28.23) (27.57) (26.20) (26.27) (26.27) (26.27)

Net margin (restated) 9.57 9.78 10.19 10.74 11.15 11.58

ROIC 18.36 18.87 17.90 19.05 20.49 22.12

Pay out ratio 69.67 66.21 68.05 66.13 66.06 65.54

Number of shares, diluted 2,883 2,855 2,854 2,855 2,855 2,855

Data per Share (EUR)

Restated basic EPS 1.63 1.83 1.89 2.10 2.27 2.47

Restated diluted EPS 1.61 1.82 1.88 2.09 2.26 2.46

% change 2.0% 13.5% 3.1% 11.1% 8.1% 8.9%

BVPS 4.74 5.41 5.73 6.54 7.41 8.38

Operating cash flows 2.72 3.27 3.26 3.65 3.86 4.15

FCF 1.08 1.68 1.68 2.05 2.18 2.35

Net dividend 1.12 1.21 1.28 1.38 1.49 1.61

Source: Company Data; Bryan, Garnier & Co ests.

Company description

Unilever is an Anglo-Dutch company

present in four product categories

(Foods, Refreshments, Personal Care

and Home Care) and divided into

three regions (Asia/AMET/RUB,

Americas, Europe).

Personal care38%

Foods24%

Resfreshment19%

Home Care19%

Sales breakdown by category, 2016

Asia/AMET/RUB43%

The Americas

33%

Europe24%

Sales breakdown by geography, 2016

Unilever

3

1. Genesis

On February 17th, Kraft-Heinz and Unilever confirmed the approach after FT Alphaville reporters,

in their Markets Live chat, discussed market rumours of a potential Kraft-Heinz bid for Unilever. The

proposal received was USD50 per share, with three-fifths payable in cash and two-fifths in shares.

This would have valued Unilever at a total equity of around USD143bn and represented a premium of

18% to the pre-offer share price. Within the food/HPC industry, acquisitions are usually carried out

at a 35% premium and it is reasonable to think that the acquisition of Unilever would not have been

an exception.

Fig. 1: Transactions in food/HPC in the last 10 years

Date Buyer Target % premium

2017 Reckitt-Benckiser Mead Johnson 30%

2016 Danone WhiteWave 19%

2015 Acorn holdings Keurig Green Mountain 78%

2015 Kraft Heinz Kraft Food 27%

2013 Henan Luohe Shuanghui Smithfield Foods 31%

2013 JAB Holdings D.E Master Blenders 1753 33%

2013 Berskshire Hathaway / 3G Capital Kraft Heinz 20%

2009 Kraft Cadbury 48%

2008 Mars Wrigley 28%

2007 Danone Numico 38%

Average 35%

Source: Companies, Bryan, Garnier & Co

Kraft Heinz, which is 27%-owned by Berkshire Hathaway and 24%-owned by 3G, has always had the

profile of a predator. So it was hardly surprising that the group was interested in Unilever's food

portfolio, which is one of the most largest in the world and has a global exposure. What was far more

unexpected was that the US company bid for the whole of Unilever. We do not think that its plan was

to dispose of the HPC business as this is the group's growth driver and leads EBIT margin

improvement.

The proposal was fiercely declined by Unilever, which said it lacked financial and strategic merits and

the price fundamentally undervalued the company. In contrast, Kraft seemed determined to pursue

the negotiations. In accordance with the UK Code on Takeovers and Mergers, Kraft had one month

to announce its firm intention or not to make an offer for Unilever.

However, it finally announced it had withdrawn its bid for Unilever only two days after the news

became public…a surprising move given that Kraft-Heinz appears as to be the most fearless

consolidator in the industry. We think the combination of political opposition and Unilever’s

resistance explain this move:

Unilever

4

The response from the political classes in the UK and Netherlands was very hostile. UK

politicians were concerned about another big UK company being acquired by a foreign

group following Brexit. Kraft Foods’ 2010 takeover of UK chocolate-maker Cadbury, in

which the acquirer later reneged on promises to retain factories in Britain, traumatised a vast

majority of UK politicians. The Dutch authorities were much quieter but legally able to

block a bid that threatens jobs or jeopardises the country’s national interests. The

parliamentary elections in the country were scheduled a month later, on 15th March.

Unilever's board and management proved to be highly resistant to the bid due to the cultural

divide between the two companies. Unilever CEO Mr Polman has always encouraged long-

term investors and preached the need to balance long-term sustainability with profitability.

The priority of 3G/Kraft is to cut costs and extend trade payables. 3G should have realised

that Unilever's management and board would never fully embrace its philosophy and the bid

would have been rejected even if the premium to the undisturbed share price were increased

from 18% to 40%. A 40% premium is equivalent to three years of total shareholder returns

(14% on average per year over the past eight years since Mr Polman became CEO). If

Unilever had agreed to the offer, it would have accelerated three years of TSR into one year

but would have lost a century of heritage and its culture would have been dismantled.

Unilever now has to prove it can generate the value it overlooked.

As time went by, it became apparent that Kraft-Heinz would have to go hostile - a process that would

have been expensive, time-consuming and potentially fruitless due to political opposition. This is why

the company preferred to walk away. We can also highlight Mr Buffett’s reluctance for hostile

takeovers. In his 2015 letter to shareholders, he said “At Berkshire, we only go where we are

welcome”.

Unilever

5

2. Is Unilever in play mode?

UK takeover rules mean Kraft Heinz is blocked from making another bid for Unilever for six months

after withdrawing its initial attempt. The most important question is: will the US company return at

the end of the period? We do not think so. The fact that the bid was rejected with such ease suggests

that Kraft-Heinz took a hasty decision. But this does not mean Unilever is not in play mode.

Unilever’s share price is now 18% above the pre-offer level, which means the group is under pressure

to meet investors’ expectations.

In a statement delivered on 22nd February, Unilever issued a press release stating it is now targeting

EBIT margin improvement in 2017 of 80bps vs 40bps previously. This is at the upper end of the

group’s medium-term guidance which was revised upwards from 20-40bps to 40-80bps at the investor

seminar at the end of November. At that time, we revised upwards our 2017 EBIT margin from

15.7% to 16.1%. The group’s announcement was a way of conceding that the percentage of savings

that fall to the bottom line needed to be increased after Kraft-Heinz’s unsuccessful bid. These savings

should amount to at least EUR1bn by 2018 and should be generated across both brand and marketing

investments and overheads thanks to the implementation of organisational/pricing changes and ZBB.

On 22nd February, the Anglo-Dutch company also announced it is conducting a comprehensive

review of options to improve value for shareholders. The results will be provided in early April.

We think the company will choose the most cautious options, which are increasing returns to

shareholders (buyback) and cost savings. Why? Two reasons: 1/ there is no need for Unilever to

change its entire strategy simply just because Kraft-Heinz made an attempt and 2/ Unilever is not an

underperformer with a TSR of 194% over the past eight years vs 137% for the Stoxx Europe 600.

The ideas of splitting food and HPC, disposing of the entire food business or undertaking wide-scale

M&A seem overly aggressive to us. However, we are not ruling out the prospect of the group

deciding to sell its spreads business in developed countries.

CEO Paul Polman seems to be seeking some political protection but cannot afford to only count on

this. He has urged the UK government to provide more help for a national company that is targeted

by a foreign bidder. For example, the target could legally have more time to build a defence against

the offer and directors could be encouraged to consider the interests of all stakeholders, including

employees, rather than just shareholders. At present, takeovers can only be blocked in the UK on the

basis of national security, financial stability and media plurality.

Unilever

6

3. Accelerating margin expansion

Despite a solid share price performance, Unilever’s EBIT margins do not compare very favourably to

many of its European peers. This is mainly due to the home care and refreshment businesses.

Fig. 2: EBIT margin of Unilever vs peers, 2016


The value creation of a Kraft-Heinz bid for Unilever was due to come from the cost savings that

would have been generated by applying the culture of Kraft-Heinz to the Anglo-Dutch company. We

assume the synergies would not have exceeded 7% of Unilever’s sales due to limited geographical

overlap between the two companies. In North America, which is the leading market for both Unilever

and Kraft, Unilever mainly sells tea and ice creams while Kraft has a strong portfolio of sauces,

coffee, dairy, processed meats and ready meals. So the solution for Unilever could be to accelerate

margin delivery in order to prove it does not need Kraft's expertise. The group already has three

savings programmes – namely ZBB, Connected 4 Growth and net revenue management with pricing

initiatives – that aim to deliver EUR1bn in savings (net of restructuring charges) by 2018,

underpinning the guidance for 40-80bps EBIT margin improvement in the medium term.

Unilever could now allow more savings to fall through to the bottom line. It has already started to

head into this direction by revising its 2017 guidance upwards in a statement delivered on 22nd

February. It now targets EBIT margin improvement of 80bps vs +40bps.

CFO Mr Pitkethly may also push for deeper cuts. The savings generated by Unilever only account for

1.9% of its sales while Danone, General Mills or Kellogg have announced savings programmes that

respectively represent 4.5%, 4.2% or 8.7% of their sales. This strengthens our view the company can

exceed its objective of EUR1bn in savings by 2018.

28.1%

17.6% 16.9%15.3% 15.3%

13.8%

ReckittBenckiser

L'Oréal Henkel Nestlé Unilever Danone

Unilever

7

With additional cost savings and more reinvestment, Unilever could accelerate the EBIT margin

improvement to 80bps over the 2017-2020 period. One thing is sure: it will be of utmost importance

that the group gives a formal objective. The market did not react very positively to the upgrade to

mid-term guidance at the end of November because it was unofficial. The official guidance remained

for “steady improvement in margin”. Such a measure would imply an average EPS accretion of 4%

over the next four years (2017-2020 period) and a Fair Value of EUR45.8, 2% below yesterday’s share

price.

Fig. 3: EPS accretion in the event of a margin upgrade

EURm Our current estimate Our estimate if revision in guidance

2017e

Sales 55 580 55 580

EBIT 8 929 8 929

EBIT margin 16.1% 16.1%

Increase in bps 80 80

Financial result -530 -530

Associates 188 188

Tax -2220 -2220

Minority interest -400 -400

Net profit _ group share 5 967 5 967

EPS 2.09 2.09

Upward revision 0.0%

2018e

Sales 57 884 57 884

EBIT 9 568 9 782




Associates 195 195

Tax -2397 -2452



EPS 2.26 2.32


2019e

Sales 60 657 60 657

EBIT 10 317 10 736




Associates 202 202

Tax -2602 -2711



EPS 2.46 2.57

Unilever

8


2020e

Sales 64 431 64 431

EBIT 11 042 11 920




Associates 205 205

Tax -2870 -3100



EPS 2.63 2.85



Unilever

9

4. Increasing cash returns to shareholders

The group is in a very healthy financial situation. This left it exposed to Kraft-Heinz, which planned

to raise debt against its strong balance sheet to help fund its purchase. We expect Unilever to have a

ratio of net debt/EBITDA of 1.0x in 2017 (1.3x in 2016).

Fig. 4: Financial structure


The group could increase its net debt/EBITDA ratio up to two and a half times in order to deter

further proposals but also to return cash to shareholders. It would have EUR15.9bn to spend,

assuming a 2017 EBITDA of EUR10.5bn.

Fig. 5: Firepower

EURm 2017e 2018e 2019e

Net debt/EBITDA ratio 1.0x 0.7x 0.5x

2.0x

Total net debt 21,048 22,474 24,146

Surplus of available cash 10,628 14,429 18,680

2.5x

Total net debt 26,310 28,092 30,183


3.0x

Total net debt 31,573 33,710 36,219


Source: Unilever, Bryan, Garnier & Co

7 355 8 456 9 900 11 505 12 614 10 420 8 045 5 466

0.91.0

1.2 1.2

1.3

1.0

0.7

0.5

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

2012 2013 2014 2015 2016 2017e 2018e 2019e

Net debt Net debt/EBITDA

Unilever

10

The last buyback that was carried out by Unilever took place in 2007 as Mr Polman used to view the

process as meaningless. He may now consider it as the least bad alternative. It is unlikely that Unilever

would spend its total firepower of EUR15.9bn on buying back shares. Assuming it uses 50%, this

would increase our 2017e EPS by 8.1% and would point to a Fair Value of EUR47.5, 2% above

yesterday’s share price.

Fig. 6: Simulation of a share buyback programme in 2017

% of the EUR15,900m cash which is used 30% 50% 80%

Amount of the EUR15,900m cash which is used 4 770 7 950 12 720

Number of repurchased shares (in millions) 102 170 272

New diluted EPS 2.20 2.26 2.35

Old diluted EPS 2.09 2.09 2.09

Accretive impact +5.2% +8.1% +12.4%

Source: Unilever, Bryan, Garnier & Co

Unilever is already one of the best in class companies in terms of returns to shareholders through

dividends. Its dividend has increased by an average of 8% per annum over the last 35 years. The

dividend pay-out ratio of 68% in 2016 compares favourably with an industry average of 55%. That’s

why we think the group should favour a buyback.

Fig. 7: Pay-out ratio

Source: Company Data; Bryan, Garnier & Co ests

34%

51%

51%

55%

55%

68%

68%

Henkel

Reckitt Benckiser

L'Oréal

Average

Danone

Nestlé

Unilever

Unilever

11

5. Disposal of the spreads business in developed countries

Before the Kraft-Heinz offer, Unilever was trading on a 2017e P/E multiple of 20.7x vs an average of

22.9x for HPC peers and 21.6x for food peers. This raised questions as to whether the market may

not have recognised the value of each business and whether management should consider a break-up

of Food and HPC to unlock value. We think it is highly unlikely that Unilever would agree to such a

radical step. The two businesses are intrinsically integrated from a cost standpoint and provide each

other critical mass in emerging countries, which account for 57% of total sales. Even if we do not

believe in such a scenario, we have calculated that it would lead to a Fair Value of EUR48, assuming

pure trading multiples, and a Fair Value of EUR61 assuming take-out multiples (premium of 25%).

Fig. 8: SOTP with pure trading multiples

2017e EBIT * Trading multiple = EV

Food 3,474 16.5 57,321

HPC 5,296 17.1 90,562

EV _ Food 57,321

EV _ HPC 90,562

Total EV 147,883

-Net debt -10,420

Total equity 137,463

Number of shares 2,854

Fair Value 48

Source of all tabs: Unilever, Bryan, Garnier & Co

Fig. 9: SOTP with take-out multiples

2017e EBIT * Trading multiple = EV

Food 3,474 20.6 71,564

HPC 5,296 21.4 113,334

EV - Food 74,517

EV _ HPC 117,730

Total EV 184,899

-Net debt -10 420

Total equity 174,479

Number of shares 2854

Fair Value 61

Source of all tabs: Unilever, Bryan, Garnier & Co

Unilever

12

Whereas we do not believe in the break-up of the food and the HPC businesses, we are not ruling out

a disposal of the spread business in developed countries. This activity has been declining constantly

for many years due to a change in consumer tastes to prioritise natural foods over those presented as

healthy. Unlike butter, spread comes from a factory. The decline in bread consumption and the

substantial reduction in the price of butter between 2014 and 2015 constituted aggravated factors.

The group has taken numerous initiatives to restore the performance of this activity. It has innovated

by creating mixtures (butter + margarine), products used for cooking (a growing segment), or by

changing the texture (liquid margarine). It has also changed the marketing content by emphasising the

naturalness of its products and trying to reactivate the pro-active brand, which aims to reduce

cholesterol. So far, all these initiatives have proved to be unsuccessful.

However, the group has always been reluctant to dispose of the spreads business, which is an

historical activity. After all, it was formed by the merger of the English soap and the Dutch spread

activities. It has also been motivated by business's high profitability (20% EBIT margin vs 15.3% for

the group) and cash flow generation. Another reason was that Unilever set up a separate unit for the

European and US activities in July 2015, named the Backing, Cooking and Spreads (BCS) unit and,

consequently, the company has been more than able to offset the operating impact of volume losses

with savings.

By applying an EV/EBIT multiple of 13.1x (20% discount relative to the average multiples for food

companies as the activity is in structural decline), we derive an enterprise value of EUR6bn. Operating

deleverage is likely to be limited since the BCS unit has its own distribution network and central

functions. We calculate a dilutive impact of 6% on EPS. This only works out to 1% if the proceeds

are used to repurchase shares. We think that, despite the dilution, the disposal would be well received

by the market as it would mechanically increase the group’s organic sales growth by 30bps and would

increase management's attention on other divisions.

Unilever

13

6. Tactical acquisitions on the agenda

The group has made many acquisitions in the eight years since Mr Polman became CEO. Most of

them were in HPC (eight out of the past 10) in order to reduce exposure to the low growth food

segments. Unilever's Home Care and Personal Care divisions registered growth twice as high as that

of Foods/Refreshments. The group’s (informal) objective is to generate 70% of sales in Personal Care

and Home Care products by 2020. In 2016, they generated 57% of the group’s sales (49% in 2010).

Fig. 10: Composition of the Unilever portfolio between Food and HPC

Fig. 11: Growth in the Food and HPC divisions


Within the personal care category, prestige brands remain Unilever’s preferred target. The group is

aiming to generate EUR1bn in sales in the segment by 2020 versus EUR400m (including Nexxus)

currently. As a comparison, L’Oréal generates more than EUR4bn in prestige brands (in its Luxury

and Active Cosmetics division). The aim is to gradually correct its overexposure to the mass market

segment whose growth rate is 3% versus 6% for prestige brands, and whose margins are inferior.

The group was particularly active in personal care in 2015, acquiring the Murad, Dermalogica, Kate

Somerville and REN brands in prestige skincare. In 2016, it acquired Dollar Shave Club, which is

specialised in a direct to consumer e-commerce sales model for shaving products and Living Proof in

premium hair care. Home Care was not neglected. Last year, Unilever bought Blue Air, which is an air

purification system and Seventh Generation, which introduced natural products into the US. We

calculate that all the bolt-on deals over the 2015-2016 period added just 2.2% to overall revenues.

51% 49% 47% 46% 44% 43% 43%

49% 51% 53% 54% 56% 57% 57%

2010 2011 2012 2013 2014 2015 2016

Food & Refreshment HPC

4.1%

0.7%

1.6%

3.5%2.8% 2.5%

10.2%

7.7%

4.7% 5.0%4.6%

6.4%

2012 2013 2014 2015 2016 5-year average

Food & Refreshment HPC

Unilever

14

Fig. 12: Acquisitions in 2015 and 2016

Date Company Business Target Sales (EURm) % of sales

2016 Living Proof Personal Care Premium hair care 46 0.1%

2016 Seventh Generation Home Care Natural house cleaning 184 0.3%

2016 Dollar Shave Club Personal Care Shaving products sold online 184 0.3%

2016 Blueair Home Care Air purification 98 0.2%

2015 GROM Refreshment Premium ice cream 50 0.1%

2015 Murad Personal Care Clinical skincare 106 0.2%

2015 Dermatologica Personal Care Skincare for professionals 221 0.4%

2015 Kate Somerville Personal Care Prestige skincare 50 0.1%

2015 REN Personal Care Skincare 50 0.1%

2015 Camay & Zest brands Personal Care Skin cleansing 207 0.4%

TOTAL 2.2%


Faced with the threat from Kraft-Heinz, Unilever could be more aggressive in acquisitions. And it has

the resources to do so. Assuming a net debt/EBITDA ratio of 2.5 and a 2017 EBITDA of

EU10.5bn, the group would have EUR15.9bn to spend.

Sizeable acquisitions could be possible in higher growth HPC, with targets such as Estée Lauder,

Colgate Palmolive or Beiersdorf. We rule out Estée Lauder (40% owned by the Lauder family) and

Beiersdorf (51% owned by Maxingvest Group) due to family ownership.

Colgate has been mooted as a target numerous times in recent years. The acquisition of the latter

would help Unilever to achieve its goal of generating 70% of sales in personal care and home care

products by 2020, thereby accelerating its transition from a food player to an HPC company. Its HPC

sales would increase by 500bps to 63% of total sales.

Fig. 13: Composition of the Unilever portfolio, 2017e

Fig. 14: Composition of the Unilever portfolio in the event of the acquisition of Colgate, 2017e

Source: Unilever, Colgate, Bryan, Garnier & Co

We consider this acquisition extremely difficult to pull off from a financial perspective. Assuming a

35% premium to the current share price, it would cost the company USD96 per share or USD87bn

Foods23%

Refreshment18%

Home Care20%

Personal Care39%

Total food:42%

Total HPC:58%

Foods19%

Refreshment15%

Pet nutrition3%

Personal care44%

Home Care19%

Total HPC:63%

Total food:37%

Unilever

15

(EUR80bn). Net debt would thus reach a very high level of 6.2x, even taking into account synergies

equivalent to 5% of sales. For the net debt/EBITDA ratio to fall to a more reasonable level of 2.7x,

the group would have to issue shares on a one for two basis at a price of EUR37.4 (a 20% discount to

current level).

Fig. 15: Impact of the acquisition of Colgate on the net debt/EBITDA ratio, 2017e

EURm 100% debt 1 for 2 right s issue

Net debt _ Unilever 10 408 10 408

Net debt _ Colgate 4 812 4 812

Debt issued for Colgate 80 000 26 836

Total net debt 95 220 42 056

Equity issue 0 53 164

EBITDA _ Unilever 10 374 10 374

EBITDA _ Colgate incl.synergies 4 884 4 884

Total EBITDA 15 377 15 377

Net debt/EBITDA 6.2x 2.7x


This acquisition would also be highly complex due to anti-trust reasons. A disposal of a portion of the

two companies would be required. We consider it very unlikely that Unilever will launch such a

transaction while a number of efforts need to be made internally.

An acquisition of a smaller company such as Edgewell seems far more likely. Financially, this is

possible. If Unilever offered a premium of 30%, this would “only” cost EUR5bn while the group has

firepower of EUR15.9bn assuming a net debt/EBITDA ratio of 2.5x. But it would add 4% to the

group’s sales. There is a strong strategic rationale behind acquiring Edgewell. The group is

underexposed to emerging countries while they account for 57% of Unilever’s sales. The Anglo-

Dutch company could use its network to expand the business. This would be particularly beneficial,

especially for the shaving business (60% of Edgewell’s sales) as 40% of this market is in EMs.

Unilever

16

7. Conclusion

We think the company will choose the most cautious options which are accelerating margin

improvement and increasing returns to shareholders (buyback). Why? Two reasons: 1/ there is no

need for Unilever to change its entire strategy simply because Kraft-Heinz made an attempt and 2/

Unilever is not an underperformer with a TSR of 194% over the past eight years vs 137% for the

Stoxx Europe 600. The ideas of splitting food and HPC, disposing of the entire food business or

undertaking major M&A moves seem overly aggressive to us. However, we are not ruling out the

prospect of the group deciding to sell its BCS unit.

1) Accelerating margin improvement

The value creation of a Kraft-Heinz bid for Unilever was due to come from the cost savings that

would have been generated by applying the cost savings culture of Kraft-Heinz to the Anglo-Dutch

company. So now the solution for Unilever could be to accelerate margin delivery in order to prove it

does not need Kraft's expertise. The group already has three savings programmes – namely ZBB,

Connected 4 Growth and net revenue management with pricing initiatives – that aim to deliver

EUR1bn in savings (net of restructuring charges) by 2018, underpinning MT guidance for a 40-80bps

EBIT margin improvement in coming years. Unilever could now allow more savings to fall through

to the bottom line. It has already started to head in this direction by revising upward its 2017 guidance

in a statement delivered on 22nd February. It now targets EBIT margin improvement of 80bps vs

+40bps. CFO Mr Pitkethly may also push for deeper cuts. The savings generated by Unilever only

account for 1.9% of its sales while Danone, General Mills or Kellogg have announced savings

programmes that respectively represent 4.5%, 4.2% or 8.7% of their sales. This strengthens our view

that the company could exceed its objective of EUR1bn savings by 2018. With additional cost savings

and more reinvestment, Unilever could accelerate EBIT margin improvement to 80bps over the 2017-

2020 period. One thing is sure: it will be of utmost importance that the group provides a formal

objective. The market did not react very positively to the upgrade to mid-term guidance at the end of

November because it was unofficial. The official guidance remained for “steady improvement in

margin”. Such a measure would imply an average EPS accretion of 4% over the next four years (2017-

2020 period) and a Fair Value of EUR45.8, 2% below yesterday’s share price.

2) Increasing returns to shareholders through buybacks

The group is in a very healthy financial situation. This has left it exposed to Kraft-Heinz, which

planned to raise debt against its strong balance sheet to help fund its purchase. We expect Unilever to

have a net debt/EBITDA ratio of 1.0x in 2017 (1.3x in 2016). The group could increase its net

debt/EBITDA ratio up to two and a half times in order to deter further proposals but also to return

cash to shareholders. It would have EUR15.9bn to spend, assuming 2017 EBITDA of EUR10.5bn.

The last buyback that was carried out by Unilever took place in 2007 as Mr Polman used to view the

process as meaningless. He may now consider it as the least bad alternative. It is unlikely that Unilever

would spend its total firepower of EUR15.9bn on buying back shares. Assuming it uses 50%, this

would increase our 2017e EPS by 8.1% and would point to a Fair Value of EUR47.5, 2% above

yesterday’s share price.

Unilever

17

If Unilever choses to both accelerate margin improvement (+80bps over the 2017-2020 period) and

increase returns to shareholders through buybacks, this would increase our FV from EUR44 to

EUR49.5, implying upside potential of only 6%. This means the positive news we expect from the

group is already partly factored into the share price while any disappointment could have a very

detrimental impact for the share performance, especially Q1 2017 should be very soft. Like its peers,

Unilever is expected to be impacted by the leap year and the late timing of Easter. These should have

a negative technical effect of -100bps and -50bps. The slowdown in Brazil, the demonetisation in

India, political uncertainty and delays in tax returns in the US should also be penalising. Our estimate

calls for 1% organic sales growth in Q1 vs +3.5% in 2017.

What are the implications for the sector?

The Danone share price rose 3% on speculation. A takeover bid could be possible due to

the shareholding structure. The stake of the historical friendly shareholders (Eurazeo, CDC,

Sofina, Predica) was significantly reduced while the reference shareholder has become MFS

(Massachusetts Financial Services). In addition, Anglo-US companies now account for 58%

of the capital held by institutional investors. If this is theoretically possible, it has to be

remembered that Danone has never been the target of a takeover bid. The offer from

PepsiCo in 2005 was just a rumour. Furthermore, note that Danone announced the

acquisition of the US company WhiteWave in July 2016, which demonstrates a willingness to

grow.

Will Nestlé need to grow? A combination of Kraft/Unilever would have created the second

consumer group in the world with market capitalisation of USD229bn vs Nestlé at

USD231bn. At the full year results release, the Swiss company indicated that it does not

want to pursue big M&A deals at the moment. It could now be forced to rush things. To

grow, it might be tempted to sell L'Oreal shares (it owns 23%) to the French cosmetics

group. We do not think the disposal will exceed 10% because L’Oréal is not allowed to

cancel more than 10% of its shares over a 24-month period. This would imply a 13%

accretive impact on L’Oréal. The market was not mistaken in immediately buying the share

on the announcement of Kraft's bid for Unilever. Note that Nestlé denied it would do so at

the release of its full year results before the Kraft bid on Unilever.

Unilever

18

Price Chart and Rating History

Unilever

Ratings

Date Ratings Price

10/06/16 NEUTRAL EUR40.95

14/11/11 end of coverage EUR99

03/05/11 NEUTRAL EUR22.39

17/09/09 BUY EUR19.03

06/08/09 No rating EUR19.8

11/02/09 SELL EUR16.445

Target Price

Date Target price

23/02/17 EUR44

27/01/17 EUR42

02/11/16 EUR44

10/06/16 EUR43

29.7

31.7

33.7

35.7

37.7

39.7

41.7

43.7

45.7

47.7

30/09/15 31/12/15 31/03/16 30/06/16 30/09/16 31/12/16

UNILEVER DR Fair Value Achat Neutre Vente

Unilever

19

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows:

Stock rating

BUY Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a

recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of

elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock

will feature an introduction outlining the key reasons behind the opinion.

NEUTRAL Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to

be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary

event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key

reasons behind the opinion.

SELL Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a

recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of

elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock

will feature an introduction outlining the key reasons behind the opinion.

Distribution of stock ratings

BUY ratings 48,5% NEUTRAL ratings 36,2% SELL ratings 15,3%

Research Disclosure Legend

1 Bryan Garnier shareholding in Issuer

Bryan Garnier & Co Limited or another company in its group (together, the “Bryan Garnier Group”) has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the “Issuer”).

No

2 Issuer shareholding in Bryan Garnier

The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members of the Bryan Garnier Group.

No

3 Financial interest A member of the Bryan Garnier Group holds one or more financial interests in relation to the Issuer which are significant in relation to this report

No

4 Market maker or liquidity provider

A member of the Bryan Garnier Group is a market maker or liquidity provider in the securities of the Issuer or in any related derivatives.

No

5 Lead/co-lead manager In the past twelve months, a member of the Bryan Garnier Group has been lead manager or co-lead manager of one or more publicly disclosed offers of securities of the Issuer or in any related derivatives.

No

6 Investment banking agreement

A member of the Bryan Garnier Group is or has in the past twelve months been party to an agreement with the Issuer relating to the provision of investment banking services, or has in that period received payment or been promised payment in respect of such services.

No

7 Research agreement A member of the Bryan Garnier Group is party to an agreement with the Issuer relating to the production of this Report.

No

8 Analyst receipt or purchase of shares in Issuer

The investment analyst or another person involved in the preparation of this Report has received or purchased shares of the Issuer prior to a public offering of those shares.

No

9 Remuneration of analyst The remuneration of the investment analyst or other persons involved in the preparation of this Report is tied to investment banking transactions performed by the Bryan Garnier Group.

No

10 Corporate finance client In the past twelve months a member of the Bryan Garnier Group has been remunerated for providing corporate finance services to the issuer or may expect to receive or intend to seek remuneration for corporate finance services from the Issuer in the next six months.

No

11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the securities or derivatives of the Issuer.

No

12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the securities or derivatives of the Issuer.

No

13 Bryan Garnier executive is an officer

A partner, director, officer, employee or agent of the Bryan Garnier Group, or a member of such person’s household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of its parents or subsidiaries. The name of such person or persons is disclosed above.

No

14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Yes

15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, price target/spread and summary of conclusions removed).

No

Summary of Investment Research Conflict Management Policy is available www.bryangarnier.com

http://www.bryangarnier.com/en/pages/legal/Summary%2Bof%2BInvestment%2BResearch%2BConflict%2BManagement%2BPolicy

London

Beaufort House

15 St. Botolph Street

London EC3A 7BB

Tel: +44 (0) 207 332 2500

Fax: +44 (0) 207 332 2559

Authorised and regulated by the Financial

Conduct Authority (FCA)

Paris

26 Avenue des Champs Elysées

75008 Paris

Tel: +33 (0) 1 56 68 75 00

Fax: +33 (0) 1 56 68 75 01

Regulated by the

Financial Conduct Authority (FCA) and

the Autorité de Contrôle prudential et de

resolution (ACPR)

New York

750 Lexington Avenue

New York, NY 10022

Tel: +1 (0) 212 337 7000

Fax: +1 (0) 212 337 7002

FINRA and SIPC member

Munich

Widenmayerstrasse 29

80538 Munich

Germany

+49 89 2422 62 11

Important information

This document is classified under the FCA Handbook as being investment research (independent research). Bryan Garnier & Co Limited has in place the measures and arrangements required for investment research as set out in the FCA’s Conduct of Business Sourcebook. This report is prepared by Bryan Garnier & Co Limited, registered in England Number 03034095 and its MIFID branch registered in France Number 452 605 512. Bryan Garnier & Co Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 178733) and is a member of the London Stock Exchange. Registered address: Beaufort House 15 St. Botolph Street, London EC3A 7BB, United Kingdom This Report is provided for information purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell relevant securities, including securities mentioned in this Report and options, warrants or rights to or interests in any such securities. This Report is for general circulation to clients of the Firm and as such is not, and should not be construed as, investment advice or a personal recommendation. No account is taken of the investment objectives, financial situation or particular needs of any person. The information and opinions contained in this Report have been compiled from and are based upon generally available information which the Firm believes to be reliable but the accuracy of which cannot be guaranteed. All components and estimates given are statements of the Firm, or an associated company’s, opinion only and no express representation or warranty is given or should be implied from such statements. All opinions expressed in this Report are subject to change without notice. To the fullest extent permitted by law neither the Firm nor any associated company accept any liability whatsoever for any direct or consequential loss arising from the use of this Report. Information may be available to the Firm and/or associated companies which are not reflected in this Report. The Firm or an associated company may have a consulting relationship with a company which is the subject of this Report. This Report may not be reproduced, distributed or published by you for any purpose except with the Firm’s prior written permission. The Firm reserves all rights in relation to this Report. Past performance information contained in this Report is not an indication of future performance. The information in this report has not been audited or verified by an independent party and should not be seen as an indication of returns which might be received by investors. Similarly, where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given (“Forward Looking Information”) they should not be regarded as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to the risk factors stated in this Report, could cause actual results to differ materially from those in any Forward Looking Information. Disclosures specific to clients in the United Kingdom This Report has not been approved by Bryan Garnier & Co Limited for the purposes of section 21 of the Financial Services and Markets Act 2000 because it is being distributed in the United Kingdom only to persons who have been classified by Bryan Garnier & Co Limited as professional clients or eligible counterparties. Any recipient who is not such a person should return the Report to Bryan Garnier & Co Limited immediately and should not rely on it for any purposes whatsoever. Notice to US investors This research report (the “Report”) was prepared by Bryan Garnier & Co Limited for information purposes only. The Report is intended for distribution in the United States to “Major US Institutional Investors” as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY 10022. Telephone: 1-212-337-7000. This Report is based on information obtained from sources that Bryan Garnier & Co Limited believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co Limited and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security. Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co Limited may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies).

Bryan Garnier Securities, LLC and/or Bryan Garnier & Co Limited are unaware of any actual, material conflict of interest of the research analyst who prepared this Report and are

also not aware that the research analyst knew or had reason to know of any actual, material conflict of interest at the time this Report is distributed or made available..

Documents

31st March 2017 Cautiousness first Fair Value …...Unilever 3 1. Genesis On February 17th, Kraft-Heinz and Unilever confirmed the approach after FT Alphaville reporters, in their