Unilever NV Positive Spread From Here. BUY - Jefferies · PDF fileA Wake-Up Call That Is Fundamentally Good News for Investors ‘This has certainly been a trigger moment for Unilever

EUR Prev. 2016A Prev. 2017E Prev. 2018E Prev. 2019E

Organic RevGrowth

-- 3.7% -- 3.8% -- 4.1% -- 4.3%

EBIT Margin -- 15.3% 15.7% 16.0% 16.3% 16.8% 16.9% 17.6%

EPS -- 1.88 2.02 2.11 2.22 2.34 2.42 2.59

Div Yield -- 3.30% -- 3.50% -- 3.80% -- 4.10%

FCF Yield

FY Dec -- 4.80% -- 5.30% -- 5.80% -- 6.40%

GBp Prev. 2016A Prev. 2017E Prev. 2018E Prev. 2019E

FY Dec -- 153.34 172.11 180.44 188.63 200.54 206.50 221.92

FY P/E 26.4x 22.4x 20.2x 18.2x

Price Performance

MAR-16 JUL-16 NOV-16 MAR-17

50

45

40

35

^Prior trading day's closing price unlessotherwise noted.

COMPANY NOTE

Target | Estimate Change

Europe | Consumer | Food & HPC 15 March 2017

Unilever NV (UNA NA)A Marmite Stock No Longer. And Still APositive Spread From Here.

EQU

ITY R

ESEARC

H EU

ROPE

BUYPrice target €51.50

(from €44.00)Price €46.10^

Price target 4,490.00p(from 3,700.00p)Price 4,042.00p^

Bloomberg AEX: UNA NABloomberg LSE: ULVR LN

Financial SummaryNet Debt (MM): €10,230.4

Market Data52 Week Range: €46.22 - €36.22Total Entprs. Value (MM): €141,813.6Market Cap. (MM): €131,583.2Institutional Ownership: 77.2%Shares Out. (MM): 2,854.3Float (MM): NAAvg. Daily Vol.: 4,543,914

Martin Deboo *Equity Analyst

+44 (0) 20 7029 8670 [email protected] Letten *

Equity Analyst+44 (0)20 7029 8020 [email protected]

* Jefferies International Limited

Key Takeaway

The NV is up 15% post-KHC and ahead of a review in April. We stay on boardand counsel investors not to underestimate the value of the galvanising shockthat has been administered. Our Buy case assumes faster progress on margins,but not a spin/split, which we think offers insufficient risk/reward from here.But the ultimate end-game remains one of building a New World Order in HPCby acquiring Colgate. April's review should be seen as a staging post to that.

A profound wake-up call, the positive impact of which should not be under-estimated. As the shockwaves abate, the galvanising impact of Kraft's (KHC's) approach forULVR shouldn't be underestimated, in our view. Despite an NV/plc share price up 15%/20%since Feb 16, we continue to see upside from here, with April's review a first staging post.

Buying Colgate our preferred end-game. Argues for a 'keep and improve'stance in April. We identify 3 end-games for ULVR, of which building a New World Orderin HPC (via Colgate) is most attractive. We project fair value across 4 scenarios of €53-€56per share, but it's a stretch without disposals. Better, we think, to hold on to non-HPC assets,in pursuit of selling a control premium later, when the time is right to pay for one on Colgate.

Upgrading stand-alone numbers to top-end of current margin guidance.Results in FY19E EPS of €259c (€279c inc. buyback). In the meantime, and witheyelids suitably fluttered at CAGNY, ULVR need to demonstrate renewed impetus on costs.We think progress beyond the top end of 40-80bps margin guidance would be a stretch.But even that offers a 7% EPS uplift by FY19 (relative to our previous high-end numbers &a 15% uplift including a €6bn annual buyback), with growth in EPS/FCF of 11%/12% paalong the way. Which can be owned for the current 21.3x PER, relative to NESN 21.0x, P&G22.5x & Colgate 24.8x.

No further upside from a spin. Costs as well as benefits. We have been advocatesof a spin/split...until we counted the costs. While we can scope an incremental c.€10bnof benefit from a spin (of Foods or Foods & Refreshment), predicated on improved valuediscovery, plus an indicative €2.75 special dividend, we also scope c.€10bn costs to achieve.The risk/reward feels unattractive and there is an opportunity cost in the form of a controlpremium foregone on any eventual sale.

Valuation/RisksOur PT of €51.50 reflects a target 15x EBITDA (was 14x) which equates to 21.6x PER, adiscount to peers at 22.8x. Risks include i.) EM demand ii.) fx.

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 52 to 56 of this report.

Contents SCENARIOS SUMMARY ........................................................................................................................ 3 A WAKE-UP CALL THAT IS FUNDAMENTALLY GOOD NEWS FOR INVESTORS ......................................... 4

A profound shock… ............................................................................................................................4 …that is likely to inspire more radical and decisive action .................................................................4 A significant and valuable catalyst for change internally ..................................................................4 Working back to April from three distinct end-games .......................................................................6 Allowing for ULVR’s belief system .....................................................................................................7

VALUE ON THE TABLE, DESPITE RAISED BAR ........................................................................................ 8 Shares up by 15%/20% since the approach .......................................................................................8 Raises the bar to additional value creation relative to undisturbed price .........................................8 Footnote: what is ULVR’s market cap? ............................................................................................10

MOVING TO THE TOP END OF MARGIN GUIDANCE. BUT CAUTIOUS BEYOND THAT ............................ 11 ULVR’s cost base: myth and reality .......................................................................................................11 SG&A efficiency not best-in-class, but not dramatically out-of-line of either .......................................11 But progress on SG&A reduction limited to date..................................................................................12

UK case study: steady work in a mature market .............................................................................13 Seeing margin progress beyond upper bound of current guidance as a challenge...............................15

ZBB programme suitably aggressive ...............................................................................................15 Not a conspicuously under-earning business relative to mix ...........................................................16

Upgrading stand-alone forecasts to the top end of guidance range. Modelling a return to Buybacks .20 Upgrading margin forecasts to the top end of the current guidance range ....................................20 Scoping a potential €18bn cumulative buyback to 2019 .................................................................20 Stand-alone forecast scenarios summary ........................................................................................21

NO FURTHER UPSIDE FROM A SPLIT, ONCE COSTS & COMPLEXITIES ARE WEIGHED ............................ 23 The case for a split ................................................................................................................................23

Questionable returns from scale and diversification .......................................................................23 But costs as well as benefits ............................................................................................................23 Potentially significant upsides: Cadbury & other case studies .........................................................24

Material potential upsides for ULVR from enhanced valuation perception, prior to any costs ............26 Still unconvinced by the synergy arguments in Developed Markets ....................................................28

UK case study: largely un-integrated other than back office? .........................................................29 Separation in the UK un- problematic, with scale diseconomies limited .........................................30

But Emerging Markets more complicated ............................................................................................31 India case study: manufacturing separability, distribution complexity............................................32

Options for a split: Gradations of Foods, DM’s vs. EM’s. The question of Refreshment .......................34 The complexity of Foods ..................................................................................................................35 The question of Refreshment...........................................................................................................36 Appraising the split options .............................................................................................................36

Limited upsides from here, once the costs and risks are properly weighed? .......................................37 Modelling two spin scenarios with a target multiple of 16.2x EBITDA ............................................38 Scoping €10-12bn of offsetting value destruction ...........................................................................38 Scoping a special dividend of €2.75 per ULVR share ........................................................................38 Limited upsides relative to our base case ........................................................................................39

ACQUIRING COLGATE ........................................................................................................................ 41 Potential ULVR/CL combinations .....................................................................................................41

Strong strategic logic ............................................................................................................................41 Good strategic fit. Competition issues manageable ........................................................................41

Modelling a deal ...................................................................................................................................43 Valuation gap currently relative unattractive .................................................................................43 Colgate, Unilever and Universal merger assumptions .....................................................................43 Colgate assumptions .......................................................................................................................43

Resultant accretion & impact on ULVR .................................................................................................44 Implications on leverage and return ................................................................................................44 Earnings accretion & valuation .......................................................................................................44 Colgate not realistically do-able for cash without offsetting disposals............................................44 Towards a pure play HPC business ..................................................................................................44 Scenario impact on geographic mix ................................................................................................45 Puts combined entity on a potentially compelling valuation ...........................................................45 No ULVR disposals sensitivity analysis .............................................................................................46 Colgate plus ULVR Foods disposal sensitivity analysis .....................................................................47 Colgate plus ULVR Foods & Refreshment disposal sensitivity analysis ............................................48

CHANGES TO FORECASTS .................................................................................................................. 49 DIVISIONAL SALES & MARGIN DRIVERS ............................................................................................. 49 DETAILED FINANCIAL FORECASTS ...................................................................................................... 50

UNA NA


15 March 2017

page 2 of 56 , Equity Analyst, +44 (0) 20 7029 8670, [email protected] Deboo

Please see important disclosure information on pages 52 - 56 of this report.

Scenarios Summary

Summary of Scenarios

New stretch case is basis for published PT of €51.50 on a rounded basis

Scenario Previous

forecast

& PT

New

Stretch

case

Stretch case

plus

buyback

Spin out

Foods/Foods

& Refresh,

plus Special

Div

Buy Colgate

for cash - no

disposals

Buy Colgate -

with new

equity

Buy Colgate -

dispose

Foods

Buy Colgate -

dispose Foods

& Refresh

Key metrics,

events &

assumptions

As published

27 Jan

80bps pa

margin

progress to

FY19 (FY19

margin 17.6%)

As previous

plus Euro 6bn

pa buyback to

FY19 (net

debt:EBITDA

2.0x)

Foods and/or

Foods &

Refreshment

spun out.

€2.75 special

div.

Net

debt:EBITDA

post-deal of

5.1x

New ULVR

equity

equivalent to

13% of total.

Net debt:

EBITDA 4.0x

Sell Foods for

11x EBITDA

Sell Foods &

Refreshment for

13x EBITDA

NV EPS (Euros)

FY16A 188 188 188

FY17E 202 211 213

FY18E 222 234 244 213 297 275 240 234

FY19E 242 259 279

CAGR 19 vs. 16 9% 11% 14% n/a n/a n/a n/a n/a

Net debt:EBITDA1 0.8x 0.7x 1.8x 1.5x 5.1x 4.0x 3.8x 1.6x

Valuation metrics

Projected price

per NV share

44.00 51.60 50.89 48.50 55.98 54.84 53.00 53.75

EV:EBITDA 14.0x 15.0x 15.0x 16.2x 15.6x 15.6x 16.5x 16.6x

PER 19.8x 21.6x 20.4x 22.7x 18.9x 20.0x 22.1x 23.0x

FCF yield 4.2% 3.9% 4.0% n/a n/a n/a n/a n/a

Valuation metrics at current share price (prospective 12 mths basis)

EV:EBITDA 15.3x 14.6x 14.6x n/a n/a n/a n/a n/a

PER 22.5x 21.2x 20.9x n/a n/a n/a n/a n/a

FCF yield 4.0% 4.5% 4.5% n/a n/a n/a n/a n/a

Source: Jefferies analysis & estimates 1 FY18 basis for comparability. Colgate scenarios exclude synergies i.e. leverage is pro-forma peak immediately after acquisition

UNA NA


15 March 2017



A Wake-Up Call That Is Fundamentally

Good News for Investors ‘This has certainly been a trigger moment for Unilever and we will not waste it’

Graham Pitkethly, ULVR CFO

A profound shock…

We return to the Unilever (ULVR) beat, in anticipation of their strategic review due in April

and in profoundly altered circumstances to those prevailing prior to February 17, the day

when ULVR received an initial bid approach from Kraft Heinz (KHC).

Our bullishness on ULVR notwithstanding, it’s fair to say that a bid for the company

wasn’t on our radar, or was part of our Buy case. Nor, evidently, was it on ULVR’s radar

either. The shock – of being the subject of a bid of any kind, let alone one from such

arrivistes as KHC/3G (the horror, the horror) – will have been profound. And will no doubt

still be resonating around the walls of 100 Victoria Embankment (100VE), ULVR’s mighty

bastion on the banks of the Thames.

Any initial humiliation has been on the Kraft Heinz (KHC)/3G side. The collapse of their

approach within 48 short hours has left their reputation for sharp and persistent deal-

making and bear-hugging damaged. Their $50 per share offer looked less an invitation to

treat and more a piece of hastily-contrived opportunism. One that was a long way short

of what would have been required to engage shareholders. They would appear to have

under-estimated both ULVR’s strategic and economic significance in Europe and the likely

complexities of seizing control of a dual-listed entity, with strong roots in Holland, a

nation with a more muscular model of stakeholder capitalism than the UK. The fawning

obsequieties of KHC’s walk-away notice must have been painful to pen.

But neither has the experience been comfortable for ULVR either. Their reluctance to be

more aggressive towards their cost base had left their P&L dangerously vulnerable to

arbitrage from an alternative owner with radically different cultural norms and margin

aspirations. An unleveraged balance sheet meant that a less well-capitalised buyer could

contemplate acquiring control, by utilising ULVR’s own debt capacity. A diverse portfolio

left plenty of potential to reduce that debt with subsequent asset disposals.

…that is likely to inspire more radical and decisive action

KHC’s incursion will mean that all three of the above issues (which have all been germane

to the shareholder debate on ULVR in the decade that this analyst has covered the stock)

must now be re-addressed. Whatever conclusions are ultimately reached, this must surely

be both good and healthy.

Such dilemmas have conditioned this analyst’s views over the years. In September 2014

we were Sellers of ULVR on the grounds of frustration with slow progress on margins and

over-dependence on slowing Emerging Markets. In January 2016 we kicked the tyres on

ZBB and found the targets to be credible. But our confidence in the willingness to do the

hard yards on cost was wanting. In December 2016 we turned Buyers, predicated on

ULVR’s growing confidence in delivery a year down the track and a depressed stock price.

But we would be lying if we didn’t confess to feeling a certain tremulousness in our new

found conviction, something which the weak Q4 did little to dissipate.

A significant and valuable catalyst for change internally

ULVR now has precisely the catalyst it needed to shift the terms of debate internally and

align the culture with more radical action. This can and should be a firm-wide process.

The tendency at times like these is to see the actors in the drama as those on the Board

and ExComm. They will be the lead players, sure enough. But change and improvement

only washes through an organisation of 170,000 employees if there is buy-in to the goals

and imperatives at the middle and bottom of the organisation.

We return to ULVR post the KHC

approach

We think this will have been a

profound shock to ULVR

Any initial embarrassment was on

the KHC side

But the experience has highlighted

ULVR’s vulnerabilities too

We expect the event to prompt more

decisive action on costs and margins,

a recurring source of frustration for

us

UNA NA


15 March 2017



Prior to 17 February it’s conceivable that this buy-in wasn’t as strong as it might have

been. ULVR’s white collar troops were being realigned into the new Connected For

Growth (‘C4G’) organisational structure, which gelled as recently as last December. A

structure that demands new ways of working and different reporting lines. This on the

back of the long march from a region-led, to a category-led, organisation that has been

underway for the past decade and a half. On top of this has come Zero-Based Budgeting

(ZBB), a source of both incremental workload (all those tiresome task force meetings) and,

no doubt, some challenge to the level of individual perquisites that do so much to ease

the stresses of the working day. Down on the shop floor, it’s been only five years since

ULVR’s sizeable UK workforce were on strike over curtailed pension benefits.

Our sense has been that both C4G and ZBB have been placing additional burdens on an

already change-weary organisation. So they might be expected to encounter some

pushback. But now any recalcitrance has been met with a counterfactual and counter-

cultural vision of the most dramatic kind.

Ratings and feedback on ULVR & KHC from glassdoor.com corroborate the anecdotes that

have featured in the newspapers over the past two weeks. These are two companies that

couldn’t be more different in terms of internal cultural norms and morale.

Exhibit 1: ULVR vs. KHC employee feedback on glassdoor.com

ULVR KHC

Sample size 2,251 2,145

Would recommend to a friend 81% 29%

Approve of CEO 94% 28%

Positive Business Outlook 68% 26%

Satisfaction scores (where 5 is best)

Culture & values 4.0 2.2

Work/life balance 3.5 2.1

Senior Management 3.3 2.1

Compensation & benefits 3.5 2.9

Career Opportunities 3.5 2.7

Overall score 3.8 2.5

Trend in overall score Up Down

Source: glassdoor.com; Jefferies analysis

Exhibit 2: Verbatim reviews from glassdoor.com

ULVR KHC

Positive ‘Fantastic brands. Great People. Collaborative, friendly, culture.

International scale. High integrity. True to their sustainability

mission.'

‘People are great. Brands are strong. Opportunities to work across

departments and develop knowledge and skills in Grocery. Have

become more shopper-focussed over time.'

‘Beautiful office. Nice perks. Nice canteen. Exposure to senior

stakeholders. Systems generally work well. Professional atmosphere.

Prestigious company to work for.’

‘Fast growth opportunity. Lean structure. Easy to be noticed.’

‘Good work culture. Smart people.’ ‘Culture is very specific and not for everyone.’

Negative/critical ‘A huge company with all the complexity and politics you would

expect.’

‘The merger completely killed the culture of a great CPG company.’

‘Be prepared for plenty of structured processes and lots of

stakeholder management.’

‘An unsustainable business model…cutting costs to the point where

some functions barely run.’

‘The same English & Dutch ‘club’ that got us here may not be the

right one to take us to the next level.’

‘Haphazard leadership and dysfunctional culture. 3G mantra

inspirational in theory but in practice targets unachievable and

leadership style brutal - miss your number and you are exited, which

happens regularly.’

Source: glassdoor.com; Jefferies analysis

The value of the KHC approach as an

internal catalyst for change will have

been enormous

glassdoor.com ratings illuminate the

cultural divide

UNA NA


15 March 2017



The implication for the typical mid-level ULVR staffer is clear. Prior to February 17 he or

she was no doubt cavilling, as one might, over the level and pace of disruption to their

internal comfort zone that C4G and ZBB was requiring. Now they have been invited to

contemplate a fate worse than 10,000 deaths. The impact will be electrifying. Not since

the dark days of 2004/2005 will senior management have enjoyed such latitude to drive

change and raise the level of expectation. They must make the most of it.

Working back to April from three distinct end-games

So rather than focus on the April review in isolation, we think it’s appropriate to start by

outlining what we think are the long term strategic end games for ULVR. We then propose

to work back from there to what they might say in April. We think there are three such

end-games, per Exhibit 4.

We think these end games both gel the debates unfolding in the market as we write and

highlight the choices that need to be made by ULVR. As it happens we don’t think the

choices have fundamentally altered since February 17. But the urgency of confronting

them, and the need for decisive and credible action, has.

Exhibit 3: Potential strategic end-games for ULVR

Source: Jefferies

And so to ULVR’s April review. Investors are right to fixate on it and the sequential market

announcements made on 22nd February have raised the level of anticipation. But we

would urge investors to keep those expectations in check: ULVR in our experience is a

conservative company that is managed for long term value, in harness to a longer term

vision and purpose.

1. Optimise & bid-proof the broad status quo

2. Split the business3. Build a New World

Order in HPC

End games for ULVR

• Increased aggression on costs & margins

• Pursue enhanced cash returns

• Continue to reposition portfolio incrementally in favour of HPC, most obviously via a spin-out of Spreads

• Spin out the Foods business as a separate listing

• Buy Colgate (or RB as a secondary option)

• Fund via a sale or carve-out of Foods

Both these options incremental to (1)Question mark over Refreshment in both scenarios

Choices

Questions

• How much harder can margins be pushed?

• How big a cash distribution?

• What is there left to sell short of a complete exit from Foods?

• Would a split create net incremental value?

• Is Refreshment a keep or a spin?

• Is there a strategic logic?• Would a ‘megadeal’ create

value?• Is there a strategic buyer

for Foods/Refreshment?

Having contemplated a fate worse

than 10,000 deaths, ULVR’s body

politic should have been galvanised

We counsel a focus on the ultimate

end-game for ULVR, not just April’s

review

But we do think that the urgency of

resolving the ultimate end-game has

increased

UNA NA


15 March 2017



If that longer-term vision is, for example, to acquire a Colgate and build a New World

Order in HPC, then we think we are unlikely to see that unveiled in April. But, should it be

the vision, any announcements made in April mustn’t preclude it and must be consistent

with it. Otherwise ULVR will lay themselves open to the charge of precipitate behaviour

that was famously levelled at Cadbury in 2007, by senior fund manager Anthony Bolton,

as they took the decision to split their business in response to activist pressure.

Allowing for ULVR’s belief system

What end-game ULVR might choose is partly a function of analysis and hard-headed

calculation. But it will also be a function of the belief system that operates within ULVR,

one that we think reflects a strong sense of mission, inclines to scale and business

diversity, rather than focus, and which reflects strong fiscal conservatism. None of this is

to argue that ULVR won’t be feeling the need to change and evolve. But is to argue that

the choices will be carefully weighed, and that long-standing beliefs won’t be abrogated

by current exigencies. What we think of the belief system is essayed below.

Belief in the virtue of independence for its own sake. The vehemence of the

response to the KHC approach signals strongly that ULVR want to retain their

independence. Any company, performing basically well, and faced with a lowball offer,

would have responded similarly. But we sense that the desire to remain independent runs

deeper within ULVR than in most companies. Not, we would suggest, for venal or self-

seeking reasons amongst the current Board and Senior Management team. But because of

the sense of purpose and manifest destiny that arises from ULVR’s long history and deep

values. Much has been made over the past two weeks around the similarities with the

Cadbury take-out in 2009/10. But then Cadbury Chairman Roger Carr said at the outset

that the debate ‘would be about (shareholder) value, and only value.’ While Cadbury

fought hard and nobly for its independence, the implication was that the company was

always for sale at the right price. We question whether we will be hearing similar rhetoric

from ULVR Chairman Marijn Dekkers. The implication is that ULVR will be wary of moves,

most obviously a split, that would make it more vulnerable to takeover.

Belief in the value of multi-category scale and risk diversification. This analyst

has argued consistently that there are limited returns to multi-category scale in Developed

Markets with a strong, consolidated Modern Trade. The case will be argued again later in

this note. Your analyst was also taught at the London Business School that ‘investors can

diversify risk more cheaply and efficiently than managers.’ ULVR, by their actions and

commentary, would appear to dance to a different drum. We might not like the beat, but

we think that they are sincere in their adherence to it. The implication, similar to the point

above, is that ULVR will be relatively reluctant to shrink its portfolio too aggressively.

A ‘DCF’, rather than earnings, mindset. ULVR’s M&A culture, on both the sell and

buy-side of deals, reflects in our experience a strong mindset around value to the

company versus value to the acquirer/vendor, reflecting Discounted Cash Flow (DCF)

analysis. The most obvious example of this has been the apparent reluctance to

contemplate a sale of the Spreads business on the grounds that it is an important

generator of cash. The implication is that ULVR don’t, or won’t evaluate deals purely on

the basis of earnings accretion/dilution and will be relatively resistant to the sort of EPS

‘grandstanding’ that might arise from a return to buybacks of pursuit of ‘megadeals’ that

are light on strategic logic and economic synergy.

A conservative approach to the balance sheet. ULVR have struck a consistently

conservative tone on balance sheet management and CEO Paul Polman has voiced his

dislike of buybacks, despite almost continuous pressure from elements in the investment

community to adopt them (on which score this analyst agrees with ULVR). ULVR hasn’t

had a buyback programme in place since 2008 and net debt:EBITDA has been below 1x

for more than 50% of the time over the past twenty years. This is not so say that ULVR

won’t gear up for the right big acquisition (they were briefly >3x net debt:EBITDA post-

Bestfoods in November 2000) or that they won’t consider buybacks as a defensive

response to a bid. But we think they will weigh carefully the risks as well as the benefits.

ULVR need to avoid seeming

precipitate or reactive

UNA NA


15 March 2017



Value on the table, despite raised bar Shares up by 15%/20% since the approach

The previous section has argued that KHC’s intervention has been unequivocally good

news for ULVR shareholders. The complication is that the good news is directionally in the

price, with the NV and PLC listings up 15% and 20% respectively relative to the close on

16 February. Relative to which we are upgrading our FY17 forecasts by c.5% to reflect

both the margin guidance upgrade of 22 February and slightly better fx.

Exhibit 4: ULVR NV forecasts & valuation pre- & post-KHC

As at 13 March. Prospective 12 mths. basis. Now reflects fx & 22 Feb guidance upgrade

16 Feb Now

NV share price €39.57c €45.60c

Market value

Market cap €110275m €129490m

Net debt (end FY17) €10511m €10230m

IAS19 deficit (end FY17) €2902m €2902m

Gross EV €123688m €142622m

Less JV's & Associates at fair value (€3283m) (€3100m)

Add non-controlling interests at fair value €16391m €16311m

Adjusted EV (for EV:EBITDA purposes) €136796m €155833m

Forecast metrics (NTM basis)

EBITDA €10073m €10546m

EPS €202.5c €214.3c

DPS €132.3c €134.9c

FCF per share €183.0c €202.0c

Valuations (NTM basis)

EV:EBITDA 13.6x 14.8x

PER 19.5x 21.3x

Dividend yield 3.3% 3.0%

FCF yield 4.6% 4.4%

Source: FactSet; Jefferies analysis

Raises the bar to additional value creation relative to undisturbed price

The impact has been to add more than a turn to ULVR’s Enterprise multiple, nearly two

turns to PER and to reduce both dividend & FCF yield by 20-30bps. So any contemplation

of what might be on the table in April needs to be compared to this higher hurdle.

Or should it? The counter-argument, advanced by some in the market, and ULVR

themselves at CAGNY the other week, is that the valuation immediately prior to KHC was

at some sort of unreasonable trough. Indeed, at that point, the NV share price had come

down by 7% from its 12 month high (achieved in early September 2016) of €42.70. This

equated to a PER of 22.4x, relative to only 19.5x on 16 February.

We’re not persuaded by this argument (of unreasonableness), for a couple of reasons.

First, almost all of ULVR’s share price decline was a function of the defensive counter-

rotation that occurred in October and November 2016: ULVR’s share price relative to the

SX3P (EuroStoxx Food & Beverage index) barely moved from early September to February

161. Second, the price on 16 February was the price of what is a well-researched and well-

understood stock. Sure we might have disagreed with it, having a Buy recommendation

and a then price target of €44. But that was just one opinion, in an efficient market.

1 ULVR fell by 3-4% relative to the SX3P on the weak Q4 on 26 January. This loss had been

regained by Feb 16, reflecting we think the subsequent weak Q4 across the sector

The NV & PLC listings are up 15% &

20% since 16 Feb

This has added more than 1 turn of

EBITDA & nearly 2 turns of PER to

valuation

We are not persuaded by the

argument that ULVR was

anomalously cheap on 16 Feb

UNA NA


15 March 2017



Exhibit 5: PER vs. EPS growth

Prospective 12-24 months1, per consensus. As at 9 March

Source: FactSet; Jefferies analysis 1 EPS growth is 12-24 mths out (‘2TM’) to minimise fx distortions

Exhibit 6: PER vs. organic sales growth

Prospective 12 months, per consensus. As at 9 March


Exhibit 7: EV:EBITDA vs. organic profit growth

Prospective 12 mths., per consensus. Adjusted for JV’s & minorities


Exhibit 8: EV: operating cashflow vs. organic profit growth

Prospective 12 mths., per consensus. Adjusted for JV’s & minorities


Exhibit 9: EPS growth vs. FCF yield



DGE

RI

BFI

RCO

BATS

PMIMO

RAI

ULVR - consNESN

BN

RBPG

CLOR

HEN3

BEI

ABI

HEIA

CARL.B

ULVR - JEFe

16.0x

18.0x

20.0x

22.0x

24.0x

26.0x

28.0x

30.0x

6% 8% 10% 12% 14%

PE

R

EPS growth in reporting currency

DGE

RI

BFI

RCO

BATS

IMB

PMI

MORAI

ULVR - consNESN

BN

RBPG

CL

OR

HEN3

BEI

ABI

HEIACARL.B

ULVR - JEFe

12.0x

14.0x

16.0x

18.0x

20.0x

22.0x

24.0x

26.0x

28.0x

30.0x

0% 2% 4% 6%

PE

R

Organic sales growth

DGERI

BFI RCO

IMB

PMIMO

RAIULVR - cons

NESN BN

RBPG

CL

OR

HEN3

BEIABI

HEIA

CARL.B

ULVR - JEFe

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

0% 2% 4% 6% 8% 10% 12%

Ad

just

ed

EV

:EB

ITD

A

Organic profit growth next 12 mths.

DGE

RI

BFI

IMB

PMI

MO

RAI

ULVR - cons

NESN

BN

RBPG

CLOR

HEN3

BEI

ABI

HEIA

CARL.B

ULVR - JEFe

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

40.0x

45.0x

0% 2% 4% 6% 8% 10% 12%EV

: o

pe

rati

ng

ca

shfl

ow

po

st c

ap

ex

& t

ax

Organic profit growth next 12 mths.

DGE

RI

BFI

RCO

BATS

IMB

PMI

MO

RAI

ULVR - consNESN

BN

RBPG

CLOR

HEN3

BEI

ABIHEIA

CARL.B

ULVR - JEFe

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14%

FC

F y

ield

EPS growth in reporting currency

UNA NA


15 March 2017



Exhibit 10: ULVR PER relative to NESN



Despite the share price ramp, ULVR’s valuation still doesn’t look unduly stretched to us,

particularly when potential upsides from margin optimisation moves are factored in.

As we discuss in the next chapter, we now feel confident in moving our margin forecasts

up to the top end of the existing guidance range between now and FY19, predicated on

the galvanising impact we expect the KHC bid to have had up and down the organisation.

If ULVR can unlock further value from further moves on the cost base, or from portfolio

and/or balance sheet restructuring, then that is further upside to our base case.

Exhibits 6 to 10 put ULVR’s valuation into context, on the basis of both current consensus

and our latest forecasts. We continue to see ULVR as offering one of the best combinations

of EPS growth and FCF yield in the wider space (which can be delivered organically and

therefore at lower risk) as well as looking compelling on our preferred metrics of

EV:EBITDA and EV:operating cashflow relative to expected organic profit growth.

ULVR is currently on a 4% PER premium to NESN (whose PER we think is understated due

to consensus reflecting underlying profit in EPS, rather than trading profit) relative to a

peak 10% premium. We think the current relative premium can be justified by the

superior growth prospects and value optionality inherent in ULVR’s current position.

Footnote: what is ULVR’s market cap?

ULVR equity valuations in this note reflect our approach of multiplying the prevailing

share price (or dividing a target valuation) by shares in issue. ULVR have advised us that

the correct number for market capitalisation purposes is the combined shares in issue as

at the 31 December 2016. This implies a market cap of €130bn in round numbers.

ULVR also advise that the correct factor from the NV to the Group is 0.55. Applying this to

ULVR and our data provider FactSet’s market caps for the NV suggests c. €142bn. Such a

discrepancy isn’t replicated across other stocks in our coverage and we struggle to explain

it. ULVR have subsequently clarified with us that they concur with our method.

Exhibit 11: Alternative takes on ULVR’s market cap

JEF method Per ULVR Per FactSet

NV share price in € 45.9

Combined shares per ULVR on 31 Dec 2839.7

NV market cap 78.68 78.25

NV proportion of combined shares 0.55 0.55

Combined market cap (€ bn) 130.3 143.1 142.3

Source: Unilever; FactSet; Jefferies analysis

40

50

60

70

80

90

100

110

120

19

95

.

19

96

.

19

97

.

19

98

.

19

99

.

20

00

.

20

01

.

20

02

.

20

03

.

20

04

.

20

05

.

20

06

.

20

07

.

20

08

.

20

09

.

20

10

.

20

11

.

20

12

.

20

13

.

20

14

.

20

15

.

20

16

.

But neither do we think that ULVR

looks conspicuously expensive if it

can deliver accelerated value

We view the valuation premium to

NESN as sustainable relative to the

prospects

We note some debate around what

ULVR’s market cap should be

UNA NA


15 March 2017



Moving to the top end of margin

guidance. But cautious beyond that

ULVR’s cost base: myth and reality ULVR is a fat, complacent, high-cost organisation isn’t it? Why the evidence is there for all

to see: Its monumental Thames-side gaff at 100 Victoria Embankment, nearly half of which

is an atrium, all indulgent thin air funded at Prime London rental rates. Not to mention its

multi-£millions renovation in the mid-noughties, courtesy of en vogue architectural

hotshot Kohn Pederson Fox. And don’t even get us started on the lavish Four Acres

‘Leadership Development Facility’ in Singapore (what was wrong with a bulk discount at

Insead?), opened at a cost of €50m in 2013.

In contrast Reckitt Benckiser make do with a nondescript 80s block at the wrong end of

Slough, while bêtes noires Kraft Heinz have moved their people out of a glossy out-of-

town campus into five open plan floors in a downtown skyscraper. Why, something must

be done to control ULVR’s largesse, angry investors might say (and do).

Well yes and no. We’d by lying if, like many, we didn’t admit to a few twinges of cynicism

and wonderment as we have toured the various demesnes of ULVR’s global empire over

the past few years. But going the other way is that ULVR is a big global business, one that

benefits from significant economies of scale in SG&A. It is a business engaged in a global

war for talent and one that believes in treating its people with care and respect, in the

interests of their longer-term wellbeing and ability to perform. And ULVR are far from the

only multinational to feel the need to erect the occasional symbol to their greatness,

including one or two investment banks we could mention.

So any debate on the cost reduction potential available to ULVR needs to stay rooted in

the facts and the analysis, not the comforting mythology. So let’s go there now.

SG&A efficiency not best-in-class, but not dramatically out-of-line of either Let’s commence at the logical starting point of Selling, General & Admin (SG&A) cost as a

percentage of sales, which is the heart of the debate about the ‘3G’ versus ‘ULVR’ way of

doing things. Exhibit 13 analyses this ratio for the usual suspect large consumer

multinationals, including ULVR. The analysis is complicated by different approaches to

cost (particularly distribution cost) allocation. However we believe that the ratios for the

key comparators of ULVR, RB, KHC & Nestle (NESN) are comparable.

The immediately striking thing about Exhibit 13 is that there is no evidence of returns to

scale in SG&A. The relative cheapskates, RB, are the smallest company in the sample while

the biggest, company, NESN, sports a relatively high ratio. We suspect that Colgate &

P&G’s ratio might include distribution costs, which typically run at 5 to 10% of sales2. We

think the lack of the intuitive inverse correlation is partly because of differences in culture

but also because Food companies have a lower sales value per unit (and hence higher

SG&A as a percentage) than HPC ones.

ULVR runs on an SG&A:sales ratio of 13%, relative to the best-in-class benchmark of RB, at

8%, which is of course a much smaller player, albeit an HPC (and Health) one. The two

‘3G’ players, KHC and ABI, run on about 10% SG&A to sales, although we can’t be sure in

KHC’s case whether this includes an element of distribution cost.

2 We have been unable to validate this from 10-K disclosures for P&G and Colgate

There is plenty of mythology in the

market around ULVR’s purported

high cost base…

..which sits in contrast to the likes of

RB and of course KHC

But we urge a focus on the facts of

efficiency, not the myths

We focus on SG&A cost, the

heartland of any ZBB programme

There is little compelling evidence of

returns to scale in SG&A across large

staples players

ULVR runs a higher SG&A ratio than

best-in-class, but is also far from

worst-in-class

UNA NA


15 March 2017



Exhibit 12: SG&A costs as a percentage of sales, relative to overall scale

Based on the most recent reported financial year with detailed cost disclosure

Source: Company data; Jefferies analysis Note: In some cases SG&A to sales has been calculated by derivation from gross margin, operating margin and A&P to sales. The picture is complicated by the fact that definitions of gross margin differ, particularly around where and how distribution costs are accounted for. But we think the ratios for ULVR, RB, DGE & NESN are comparable. NESN’s ratio rests on an assumption of A&P:sales of 7%,which is not disclosed and is our estimate

So the facts would suggest that there is potential for ULVR to make savings in SG&A.

Given its scale, we would have thought that a high single digit percentage of sales should

be attainable, equivalent to a reduction of at least 30% from current levels. Whether ULVR

want to deliver this is a question primarily of their appetite. Let’s return to that below.

But progress on SG&A reduction limited to date Our long-standing critique of ULVR has been that operating margins haven’t progressed

as strongly as we would like, relative to what has been achieved by best-performing peers

and the imperative to buttress weak top line with compensating improvement in margin.

In fairness to ULVR, the rate of progress has improved, with the five year average

improving from 18bps in 2013, to 21bps in 2014 and 36 bps now. This has been driven

by two years of above-trend improvement in 2015 & 2016. However these have arguably

been relatively ‘easy’ years, where input cost pressures have been subdued and US

players have been obliged to take a benign pricing stance given adverse $ fx.

Exhibit 13: Average progress in adjusted/core operating margins

In basis points. Most recent five financial years. At actual fx

Source: Company data; Jefferies analysis

NESN

ULVR

RB

CL

PG

ABIKHC

DGE

0%

5%

10%

15%

20%

25%

30%

0 10 20 30 40 50 60 70 80 90 100S

G&

A %

of

sale

s

Sales (USDbn)

119

74

36

126

(5)

RB CL ULVR NESN PG Danone

While margin progression has

accelerated, ULVR remains middle of

our performance table

UNA NA


15 March 2017



So ULVR still remains #3 in our table, albeit now ahead of NESN. RB and Colgate have

higher base margins, but it remains the case that RB’s 120bps of progress and Colgate’s

75bps amount to an incremental one to two points faster earnings growth over five years.

Turning to the principal moving parts of core margin, namely gross margin, SG&A and

Brand & Marketing Investment (BMI) it can be seen that ULVR’s operating margin

progress has come solely from improvement in gross margin. BMI was increasing as a

percentage of sales prior to 2016, while SG&A started to climb again in 2015 & 2016,

having fallen in the two years prior to that. While this was partly due to adverse fx on

SG&A in 2015, it’s hard to argue that ULVR have taken really decisive action on its SG&A

base prior to the unveiling of Zero-Based Budgeting (‘ZBB’) in December 2015.

Exhibit 14: ULVR margin moving parts since 2004

% of sales

Source: Unilever; Jefferies analysis 1 Gross margin prior to 2010 includes distribution & selling costs to improve comparability to post-2010 margin. SG&A prior to 2010 is Admin Expenses per old ULVR reporting

UK case study: steady work in a mature market

There is a lot going on in ULVR’s global SG&A cost line. So in order to undertake a

‘cleaner’ analysis, in a single market, we have drilled down in the UK. This has been

possible because ULVR’s UK trading entity, Unilever UK Ltd, files annual returns.

The UK is ULVR’s fourth biggest market worldwide (behind the USA, Brazil and India) and

is its largest European market by some margin. The business was extensively re-organised

in 2007-2009, when three operating companies headquartered respectively in Kingston-

upon-Thames (Home and Personal Care), Crawley (Foods) and Walton-on-Thames (Ice

Cream) were amalgamated into one new Head Office at Leatherhead, Surrey, under the

auspices of then Chairman in the UK, Dave Lewis. Lewis offered extensive disclosures at

the 2008 Investor Seminar at Port Sunlight to the effect that the move to Leatherhead was

facilitating extensive overhead reduction following a detailed cost benchmarking study.

This is apparent in the data. Ignoring the transitional year of 2007 (Unilever UK was

formed only in the middle of 2007), the business started life with close to 4400 heads in

2008, including nearly 600 in admin. By 2014 this had been reduced to under 4000

heads, despite 20% cumulative organic growth in the intervening years and the

integration of the acquired Alberto Culver and Sara Lee businesses in 2010 /2011. Sales

per employee accordingly rose, by c.3% pa between 2008 and 2014. Headcount fell

further in 2015 but this reflected in part the carve-out the Baking, Cooking and Spreads

(BCS) Company into a separate entity in April 2015, with close to 200 associated heads.

41.0%38.9% 39.8% 40.0%

38.4% 39.5%41.5%

39.9% 40.5% 41.6% 41.4% 42.2% 42.7%

13.7%

11.4%

12.5% 12.4% 11.4%11.5% 14.2% 13.3%

12.5% 12.7% 12.1% 12.4% 12.7%11.7%

12.8%

13.1% 13.2% 12.5% 13.3% 13.7% 13.1%

14.2% 14.8% 14.8% 15.0% 14.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Gross margin SG&A BEI

New 'core profit' definitionOld definition

Operating margin progress has

come from GM, not SG&A

We case study the UK in more

detail…

…where overheads were extensively

rationalised in 2007-2009

UK headcount has fallen consistently

despite rising sales

UNA NA


15 March 2017



Like many of ULVR’s Developed Market businesses, UK sales slowed markedly in 2014 &

2015 as demand remained subdued and commodity inflation cycled out. Margins fell by

several percentage points to c.4%.3

Exhibit 15: ULVR UK LFL sales growth

Source: Unilever; Jefferies analysis Note: 2008 to 2012 is as disclosed in Companies House accounts. 2013 & 2014 is based change in domestic sales. 2015 is based on change in continuing ops sales ex BCS

Exhibit 16: ULVR UK adjusted operating margin

Source: Unilever; Jefferies analysis

Exhibit 17: ULVR UK headcount


Exhibit 18: ULVR UK admin costs to sales ratio


Behind the scenes, admin costs as a percentage of sales fell consistently from 2009 to

2012, reflecting, we assume, efficiencies. Since 2012 they have stayed fairly constant as a

percentage of sales, despite tough conditions4.

So we find both positive and negative messages from our UK case study. On the positive

side, SG&A has flatlined as a percentage of sales in recent years. This suggests potential

for improvement, facilitated by ZBB and new C4G ways of working. On the other hand it

might suggest that ULVR have already maxed out on SG&A efficiencies, having

undertaken a de facto ZBB exercise in 2007-2009, facilitated by a move to a greenfield

site.

3 We don’t consider the absolute level of operating margin for ULVR UK to be meaningful,

reflecting as it does transfer pricing in from ULVR’s Unilever Supply Chain Company AG

(‘USCC’). We do however assume the margin trend to be meaningful 4 We can’t explain the fall in admin heads and costs that occurred in 2013.

-1%

0%

1%

2%

3%

4%

5%

2008 2009 2010 2011 2012 2013 2014 2015

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2007 2008 2009 2010 2011 2012 2013 2014 2015

2101 2277 2065 2064 2230 2245 2157 2061 1895

1018

15371621 1585

1685 1698 15811409

1279

715

573397 336

395 397329

356351

2007 2008 2009 2010 2011 2012 2013 2014 2015

Production Marketing & Selling Admin0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2007 2008 2009 2010 2011 2012 2013 2014 2015

UK SG&A:sales fell from 2009-2012,

but have flatlined since

We think our UK case study signals

renewed potential for improvement

UNA NA


15 March 2017



Seeing margin progress beyond upper bound of current guidance as a challenge To advance the analysis, and the argument, we return to and refresh some detailed

analysis at the Group level that we undertook initially in January 2016, as we appraised

ZBB for the first time. We have updated this analysis for the FY16 out-turn and firmer

guidance commentary given at last December’s Port Sunlight seminar.

We continue to probe the upsides on margin through two complementary perspectives:

Bottom up, in terms of the structure of the current cost base and the relative

aggression of the current ZBB savings programme in this context

Top down, in terms of the evolving mix of categories, peer group benchmarks

in these categories and ULVR’s track record on margin progression

A re-review of this analysis leads us to stick to our conclusion that progress beyond the

upper bound of current 3 year guidance of between 40bps and 80bps will be challenging

for ULVR. This implies a terminal (FY19) margin of between 17.5% and 18.0%.

Let’s start by looking bottom up, at ULVR’s cost base by line item. As we have already

observed above, ULVR has a generally good record on gross margins (GM’s) to date as a

result of ongoing gross supply chain savings in the €1bn+ range, structural change in the

portfolio in favour of higher GM HPC and incremental ‘maxing the mix’ initiatives at sub-

category level.

ZBB programme suitably aggressive

So the focus of the current ZBB programme has been the SG&A cost base. The core of this

is the €5.7bn or so of ‘pure’ SG&A cost (essentially white collar staff functions and

associated overhead such as property and IT costs). Also in scope for ZBB will be R&D cost

of around €1bn and the ‘non-working media’ (how this analyst’s former advertising

colleagues hate that term) component of Brand & Marketing Investment (BMI). We think

this will be around 20% of total BMI spend of €7.7bn, say around €1.5bn. So there is

around €8bn of total cost in-scope for the ZBB programme.

Exhibit 19: ULVR’s cost base by component

Based on FY16A


€52.7bn

€21.1bn

€1.5bn

€7.6bn

€7.7bn

€1.0bn

€5.7bn

€8.0bn

Sales Raw & Pack D&A Oth. COGs BMI R&D SG&A Core Profit

40% 3% 14% 15% 2% 11% 15%% sales

€1bn+ ZBB goal as % of:Sales: 200-250bps

All costs: 250-300bpsSG&A costs: 20-25%

We review and refresh our integrated

analysis of margins from 2016

We think that progress on a 3 year

view above the top end of current

guidance will be tough to achieve

The €1bn+ ZBB target needs to come

out of a c.€8bn target cost base

UNA NA


15 March 2017



ULVR’s delivery partner in ZBB, consulting firm Accenture, cite savings of between 10%

and 40% of SG&A cost from ZBB, depending on line item. They claim resultant

improvements in EBITDA of between 25% to 50%.

Exhibit 20: Accenture’s view of potential ZBB savings

Source: Accenture: ‘Closed Loop Cost Management’

ULVR’s implied ZBB target of 20 to 25% of SG&A cost looks suitably aggressive to us in

this context. It’s well in the mid-range of Accenture’s claims. And while it implies a much

lower improvement in EBITDA than Accenture claim (c.10%, even if all the savings go to

the bottom line) that calculation depends acutely on what starting point SG&A:sales and

EBITDA margins are.

ULVR’s consistent commentary on ZBB has been to the effect that it’s not a ‘full on’ 3G

style programme and is instead targeted at looking at cost more insightfully and creatively

in a way that inspires better ways of working, not just cost savings. We have also opined

that ULVR won’t want to fracture their internal ‘social contract’ with white collar staff such

as would occur if an ultra-aggressive programme was instituted. Some will argue that this

calculation has altered fundamentally since February 17. We are not so sure: ULVR have

many levers to pull to unlock value, of which ZBB is just one.

Not a conspicuously under-earning business relative to mix

A complementary top-down analysis reinforces our caution around margin progress

going beyond the upper bound of current guidance. Our core argument is that, contrary

to myth, ULVR is not a conspicuously under-earning business relative to its mix of

categories, geographic exposures and competitive challenges.

Exhibit 22 compares operating margins across the broad peer group. ULVR is a mid-table

player in a peer group that tends to have large multinational HPC businesses at the high

end and a mix of smaller multinational HPC’s and local Food businesses at the low end.

The reality is that ULVR is a hybrid Foods & HPC business with characteristics of both

groupings. It is also a business more heavily exposed to Emerging Markets than most,

where peer margins tend to be lower and the need to invest is higher.

ULVR’s ZBB goal looks suitably

stretching relative to partner

Accenture’s benchmarks…

…particularly when the nature of

ULVR’s ‘social contract’ with its staff

is factored in

We stick to our view that ULVR isn’t

an under-earning business relative to

its mix

UNA NA


15 March 2017



Exhibit 21: Peer group operating margins in broadly comparable business to Unilever

FY16 for ULVR, NESN & KHC. Latest reported FY for peers. Reflects margins in broadly comparable businesses to ULVR (see notes)

Source: Companies; Jefferies analysis & estimates Notes 1. Danone excludes Medical Nutrition, 2. Edgewell excludes Wet Shave, 3. Henkel excludes adhesives, 4. Kao excludes Speciality Chemicals & Health Care, 5. L’Oreal excludes Body Shop

We frame the debate by looking at ULVR’s mix of sales by region and category (Exhibit 23)

and our estimates of margins in each region/category (Exhibit 24). This reveals that ULVR

tends to have some mature businesses earning exceptionally high margins (e.g. Spreads

in Europe) and some growth businesses earning much lower ones (e.g. the nascent parts

of the Home Care and Refreshment empire). Advancing margins via category mix and

margin improvement is therefore a non-trivial challenge.

Exhibit 22: ULVR sales value map by geography & category

Chart areas proportionate to sales in €bn at ULVR selling prices. Estimated, consistent with FY16A totals

Source: Jefferies analysis & estimates

ULVR Predominantly HPC Predominantly Foods

0.0

42

5.5

% 7.7

%

8.5

% 11

.3%

11

.9%

12

.0%

12

.2%

12

.9%

13

.3%

13

.3%

13

.9%

14

.0%

14

.8%

14

.8%

15

.3%

15

.3%

15

.5%

15

.8%

17

.1%

17

.2% 20

.5%

21

.9%

24

.0%

24

.7%

1.50.3

2.51.3 3.7 0.8

2.1

1.0 5.2

3.2

1.5

6.2

1.01.7

0.6

2.1

1.1

1.2

2.3

1.04.3

0.41.1

0.41.2

1.8 0.41.0 0.3 0.8 0.7

0.1 0.1 0.1 Spreads€2.9bn

Other Foods€9.6bn

Refreshment€10.0bn

Personal Care€20.2bn

Home Care€10.0bn

W. Europe€10.7bn

NorthAm€9.1bn

LatAm€8.0bn

Emerging Asia€14.0bn

AME€3.2bn

CEE€2.5bn

Dev Asia€5.3bn

Total€52.7bn

We explore the question of a fair rate

of margin starting with the current

sales and margin mix

UNA NA


15 March 2017



Exhibit 23: ULVR estimated margins by geography & category

Estimated, consistent with FY16A. Chart areas proportionate to sales. Omits margin estimates for segments with low materiality


Exhibits 25-30 look at ULVR margins relative to peers in related categories and

geographies. This supports the thesis that ULVR aren’t conspicuously under-margined:

Margins in Foods are upper quartile (Spreads margins are even higher). Ditto Personal

Care. Home Care margins are low and therefore a big source of upside. Refreshment

wants for benchmarks but probably also has upside. Emerging Market and Europe

margins are average and North American margins are low end. But much depends on

category mix in the market and overall local scale.

Spreadsc.19%

Other Foodsc.17.5%

Refreshment9.9%

Personal Care19.1%

Home Care9.7%

W. Europec.16%

NorthAmc.16%

LatAmc.15%

Emerging Asiac.16%

AMEc.10%

CEEc.12%

Dev. Asiac.16%

c.8%

c.19%

c.11%

c.19%

c.19%

c.12%

c.10%

c.11%

c.17%

c.11%

c.11%

c.10%

c.8%

c.15%

c.7%

Group15.3%

c.20%

c.20%

c.21%

c.18%

c.19%

c.8%

c.18%

c.10%

c.20% c.20%

Margins are peer superior or peer

comparable ex Home Care

UNA NA


15 March 2017



Exhibit 24: Peer margins in Foods ex. Spreads

Source: Companies; Jefferies analysis & estimates Note: ULVR is estimated. NESN is underlying, not trading, margin

Exhibit 25: Peer margins in Personal Care

Source: Companies; Jefferies analysis & estimates Note: RB is estimated excluding Foods & Healthcare

Exhibit 26: Peer margins in Home Care

Source: Companies; Jefferies analysis & estimates Note: RB includes some Personal Care businesses

Exhibit 27: Peer margins in North America

Source: Companies; Jefferies analysis & estimates Note: RB is Europe & North America combined

Exhibit 28: Peer margins in Europe

Source: Companies; Jefferies analysis & estimates Note: RB is Europe & North America combined

Exhibit 29: Peer Margins in Emerging Markets

Source: Companies; Jefferies analysis & estimates Note: ULVR is estimated. Peer margins reflect either overall EM averages or reported margins from LatAm, Asia or Africa

This top down analysis corroborates some of our caution from the ZBB perspectives and

leads us to question whether ULVR can put any more margin guidance on the table than

they already are.

5.5%

8.5%

11.3%

12.0%

12.2%

14.8%

17.1%

17.2%

17.5%

18.6%

22.1%

24.0%

26.9%

Bimbo

Tingyi

Mondelez

Brasil Foods

Danone

Campbells

Premier Foods

Gen. Mills

Unilever

Nestle

Heinz

Kraft

RB

4.2%

7.7%

9.7%

11.9%

13.3%

13.9%

14.0%

14.8%

15.3%

16.8%

19.1%

20.5%

21.2%

Shisheido

Oriflame

Kao

Beiersdorf

Johnson Johnson

Natura

PZ Cussons

Edgewell

Henkel

P&G

Unilever

L'Oreal

RB

9.7%

16.2%

16.4%

18.8%

21.2%

Unilever

Henkel

P&G

Kao

RB

8.6%

14.8%

16.0%

20.6%

26.0%

27.2%

28.2%

Danone

Campbells

Unilever

Gen. Mills

Kraft

Colgate

RB

12.7%

14.9%

15.3%

15.7%

16.0%

17.1%

22.0%

23.3%

25.5%

28.2%

Mondelez

Dairy Crest

Nestle

Danone

Unilever

Premier Foods

PZ Cussons

Colgate

Heinz

RB

8.4%

8.5%

10.8%

11.6%

12.9%

13.9%

14.0%

18.7%

19.8%

24.0%

Mondelez

Tingyi

Bimbo

Danone

Brasil Foods

Heinz

Unilever

Nestle

RB

Colgate

UNA NA


15 March 2017



Upgrading stand-alone forecasts to the top end of guidance range. Modelling a return to Buybacks Upgrading margin forecasts to the top end of the current guidance range

We now integrate these perspectives to inform a new forecast. The increase in FY17

guidance is a clear signal that ULVR plan to accelerate capture of ZBB savings and, we

suspect, increase the retention rate on those savings. We expect this to drive an

accelerated rate of margin progress beyond FY17, with the biggest gains being made in

the under-margined categories of Home Care and Refreshment. This gives us confidence

that ULVR can continue to bat at the upper end of the 40-80bps guidance range.

But not beyond it, in our view. Exhibit 31 highlights the extent of the challenge.

On the upside, we assume that Home Care can continue to grow margins at close to its

recent and high rate of 150-200bps. This projects an FY19 margin of 14.9%, which we see

as directionally consistent with Home Care EVP Nitin Paranjpe’s assertion at Port Sunlight

to the effect that he saw no reason why Home Care margins couldn’t exceed the group

average at some point in the future. Our FY19 forecast assumes that they achieve the

current group average (more or less) in three years.

We also assume accelerated margin progress in Refreshment (Ice Cream and Tea).

Consistent margin progress has been made in the past two and a half years and ULVR

seem to be getting to grips with low levels of ROIC in Ice Cream via mix improvement and

cabinet management initiatives. ROIC in Ice Cream improved by 300bps between 2013

and 2016, around half of which was margin, according to EVP Kevin Havelock.

We also assume that Personal Care can deliver a higher rate of margin growth than it has

in recent years as organic growth recovers, mix continues to improve and the category

benefits from its share of ZBB savings. But there are risks here: starting point margins are

high, the category is competitively intense and ULVR has some performance-fixing to do.

Exhibit 30: Projected FY19 core margins & 3 year progression

2015/16

avg. LFL

2015/16

Core

margin

pa

2016A

Core

margin

Projected

LFL

Projected

Core

Margin

pa

2019E

core

margin

Personal Care 4.2% 20bps 19.1% 5.0% 50bps 20.8%

Home Care 5.4% 170bps 9.7% 5.0% 150bps 14.9%

Refreshment 4.5% 55bps 9.9% 4.0% 100bps 13.3%

Foods 1.8% (35bps) 17.9% 2.0% 10bps 18.2%

Total 3.9% 40bps 15.3% 4.1% 80bps 17.6%

Source: Company data; Jefferies analysis & estimates

On the (relative) downside, we assume that Foods margins progress only slowly, given

the high starting point relative to the peer group and the need to invest in defending the

top line. Our forward projection of 15bps of annual progress reflects significant

improvement relative to the most recent two years.

Scoping a potential €18bn cumulative buyback to 2019

ULVR’s April review remit has made explicit reference to the Balance Sheet. We read this as

an open-ness to fresh thinking around enhanced cash returns to shareholders.

ULVR’s CEO Paul Polman has of course vigorously resisted Buybacks over the years. We

have some sympathy with his position, taking the view that headline earnings accretion is

largely offset by PER compression, as the result of the higher cost of leveraged equity.

However we now expect more pragmatic counsels to prevail, post-KHC. Partly as the

result of shareholder pressure and the symbolism inherent in such a shareholder friendly

move. More critically, because one of the hard lessons from KHC was that a smaller

Our peer analysis informs our new

medium term margin forecasts

We think that core margins of 17-

18% by FY19 is a realistic target

We model a buyback scenario that

reflects a target net debt:EBITDA at

end FY19 of 2.0x

UNA NA


15 March 2017



predator was able to contemplate taking out ULVR using its own under-leveraged balance

sheet. We expect this to shift hearts and minds inside 100VE.

We accordingly model an upside (for EPS) case that has ULVR buying back to hit a target

net debt:EBITDA multiple of 2.0x by the end of 2019. This implies a c.€6bn annual

programme between now and then.

Stand-alone forecast scenarios summary

Exhibit 32 summarises our forecast scenarios based on the above discussion. We reference

as a baseline our previous published forecast from January 27, which resolved to an FY17

EPS of €202c rising to €243c by FY19. This forecast reflected c.40bps of margin

progression in FY17, rising to c.60bps in FY19, the latter the mid-upper range of

guidance. Subsequent fx movements would have been a c.2% upgrading influence.

Exhibit 31: Summary forecasts (published forecast shaded grey)

Organic growth

FY16A FY17E FY18E FY19E FY20E CAGR

19 vs.16

Previous published forecast 3.7% 3.8% 4.1% 4.3% 4.3% 4.1%

Above at latest fx 3.7% 3.8% 4.1% 4.3% 4.3% 4.1%

New stretch margin forecast 3.7% 3.8% 4.1% 4.3% 4.3% 4.1%

New forecast plus buyback 3.7% 3.8% 4.1% 4.3% 4.3% 4.1%

Core margins

FY16A FY17E FY18E FY19E FY20E Delta pa

19 vs.16

Previous published forecast 15.3% 15.7% 16.3% 16.9% 17.3% 56bps

Above at latest fx 15.3% 15.7% 16.3% 16.9% 17.3% 55bps

New stretch margin forecast 15.3% 16.0% 16.8% 17.6% 18.4% 76bps

New forecast plus buyback 15.3% 16.0% 16.8% 17.6% 18.4% 76bps

Net debt:EBITDA

FY16A FY17E FY18E FY19E FY20E

Previous published forecast 1.3x 1.0x 0.8x 0.6x 0.4x

Above at latest fx 1.3x 1.0x 0.8x 0.6x 0.3x

New stretch margin forecast 1.3x 1.0x 0.7x 0.5x 0.2x

New forecast plus buyback 1.3x 1.6x 1.8x 2.0x 2.0x

NV EPS (in Euro c)


19 vs.16

Previous published forecast 188.1 202.1 221.5 242.5 261.6 9%

Above at latest fx 188.1 206.6 226.9 248.4 267.9 10%

New stretch margin forecast 188.1 210.5 233.8 258.6 285.2 11%

New forecast plus buyback 188.1 213.2 243.8 278.9 319.0 14%

PLC EPS (in GBp)


19 vs.16

Previous published forecast 153.3 172.1 188.6 206.5 222.7 10%

Above at latest fx 153.3 177.0 194.5 212.8 229.6 12%

New stretch margin forecast 153.3 180.4 200.5 221.9 244.9 13%

New forecast plus buyback 153.3 182.7 209.0 239.0 273.4 16%

% EPS deltas relative to previous published forecast

FY16A FY17E FY18E FY19E FY20E

Latest fx 0% 2% 2% 2% 2%

New stretch margin forecast 0% 4% 6% 7% 9%

New forecast plus buyback 0% 5% 10% 15% 22%


Our best case optimised forecasts

indicates FY19 EPS 15% higher at

€279c

UNA NA


15 March 2017



Our new published forecasts (shaded grey in the Exhibit and set out in detail at the end of

this note) now assume consistent margin progress at the very top end of the range i.e.

80bps pa. This is consistent with new ULVR guidance for FY17 issued on 22 February and

our own analysis and conjecture as set out above in the out years. The effect is to upgrade

FY19 EPS by 7% relative to our previous published forecast of 5% at constant fx.

Our speculative Buyback case projects FY19 EPS of €279c, being a 15% upgrade to our

previous published forecast (13% at constant fx) and a cumulative 8% upgrade to our

new stretch margin case forecast.

UNA NA


15 March 2017



No further upside from a split, once

costs & complexities are weighed

The case for a split Questionable returns from scale and diversification

KHC’s intervention has put the question of whether ULVR should break itself up in some

way firmly back on the table. ‘Portfolio’ has now been identified by ULVR as one of the

four legs of its strategic review process. While this might not be intended to allude to the

idea of a split, the market is abuzz with that kind of speculation. So the issue needs to be

tackled, as comprehensively and analytically as possible.

This analyst has been a long term advocate of a ULVR split, for virtually the whole of the

ten years he has covered the stock. This reflects two strong convictions.

The first and most important is that we are simply unconvinced by the returns from multi-

category scale: manufacturing synergy is non-existent and distribution synergy is limited

outside certain Emerging Markets. What little cost synergies there are will be limited to

shared back office functions. So the argument turns on revenue synergy: the idea that

aggregate scale within a particularly territory or in a particular retailer confers some sort of

benefit. Or to put the issue more specifically, the idea that ULVR gets some combination of

better terms, more listings and more shelf space from Tesco because it is the UK market

leader both in margarine and deodorant. We have always struggled with that and still do.

Going the other way is that increased category focus can be very positive for performance.

The positive case study is Cadbury. A business that was chided for years for weak earnings

growth and low margins in its core confectionery business, grew operating profits at a

compound rate of over 20% in its two brief years as a pure play confectionery player. It’s

subsequent take out by Kraft (for what looks now like a low valuation) might have been a

loss to the nation, but was a further big source of upside for shareholders.

But it’s not just Cadbury who is the poster child for separation. The spin-outs of

Kraft/Mondelez and Altria/Philip Morris have both been strongly positive for value.

Our second objection to ULVR’s complexity is a more straightforward one: the idea that

investors can diversify risk more cheaply than managers can. If there are no returns to

scale from being in both Foods and HPC together, then why not list those entities

separately and allow the market to better scrutinise their value and risk profiles?

But costs as well as benefits

We see three clear areas of benefit from a split. The most widely cited rationale for a

corporate split is that investors might be inclined to attribute a higher aggregate value to

multiple entities over which they have more visibility and scrutiny, rather than one

‘conglomerate’ with a resultant discount attached. A further benefit is that it might be

possible to create more segmented and differentiated investor appeals, most obviously by

configuring the divided balance sheets differently. There should also be commercial and

operational benefits from focus. The divided businesses are smaller and simpler to

manage, managers have narrower spans of control and there is no longer any ‘poor

relation’ syndrome in respect of the ‘non-core’ business.

Splits don’t however come for free and there are significant costs to separation. The most

obvious is the one off costs of advisory fees and arrangement fees. These have been

quantified at something like 2% of the transaction value. There may also be permanent

diseconomies of scale: most obviously from the duplication of Board, Exec Comm and

‘plc’ functions (if the spun out business is listed.). But also potentially from duplication in

internal functions such as sales and distribution. Finally there are ‘stranded’ costs, in the

form of excess shared costs left behind in the parent that are no longer covered by the

contribution from the spun out entity. These need to be worked out over the early years

‘’Portfolio’ is part of the April review

process, with the market looking for

a split

We remain unconvinced by the

benefits of multi-category scale…

…and think further that a narrower

category focus can be positive for

performance

We also hold to the view that

investors can diversify risk more

efficiently than corporate managers

We therefore think that a split could

unlock a lot of value upside

But only after incurring one-off costs,

stranded costs and some permanent

diseconomies of scale

UNA NA


15 March 2017



post the spin. Cadbury estimated stranded costs as 2-3% of the surviving confectionery

businesses sales, for example.

Exhibit 32: Generic sources of value creation & destruction from a split

Source: Jefferies

Potentially significant upsides: Cadbury & other case studies

Despite this balance of costs and benefits, the preponderance of evidence suggests that

there are significant net value benefits from spin-outs. Let’s first return to the Cadbury

example, as it’s both analogous to ULVR and close to home for many ULVR investors and

analysts.

The story is, we think, well known. In March 2007 the Cadbury Schweppes Board

announced the splitting of the business into separate confectionery and soft drinks

companies. The immediate catalyst was position-building by a vocal activist investor,

Trian Fund Management, led by Nelson Peltz. The move was seen as a sign of weakness in

many quarters, but Cadbury were adamant that the decision to split had been live for a

long time prior to Trian’s involvement. Following the failure to achieve a trade sale of the

soft drinks business, Cadbury elected to spin the business out into a separate listing on

the NYSE. This duly occurred in April 2008.

This focussed attention on a surviving confectionery business with good growth but low

margins (10%) partly due to inherent inefficiency and partly as a result of the stranded

cost burden alluded to above. The confectionery business soon started surprising

consistently on the upside and grew its profits at constant fx at a compound rate of over

20% in 2008 & 2009. In September 2009 Cadbury was the subject of a bid from Kraft

(now Mondelez), which went unconditional at 840p per share in January 2010.

The Cadbury saga unfolded in very difficult markets during the Global Financial Crisis. So

the best indicator of value creation is performance relative to the FTSE 100, which was

50% ahead from the decision to split to the ultimate take out.

We see Cadbury as a strongly positive case study of the value creation from a category-

based split in the consumer goods space and one strongly analogous to ULVR. The

complication is that we are viewing it through a pure near-term shareholder value lens,

where a lot of the value creation was from a take-out of one of the separate entities. This

may of course not be the way ULVR are seeing it, either because they value independence

for its own sake, or because they want to be in control of the timing and quantum of any

bid premium for a separated business, should they want to invest this elsewhere.

Enhanced value perceptions as a result of increased visibility

More segmented investor appeal e.g. growth vs. income proposition

Commercial & operational benefits from increased focus

One-off costs to achieve e.g. advisory fees, finance arrangement fees, relocation expenses

etc.

Permanent diseconomies of scale, definitely plc and back office costs, but also potential

operational costs

Stranded costs: temporarily uncovered costs in the rump business that need to be

eliminated over time

Potential value creation Potential value destruction

Cadbury plc is a strongly positive

case study of the value of a spin out

The former Cadbury entity increased

its value by 50% in three years,

market-relative

UNA NA


15 March 2017



Exhibit 33: Cadbury synthetic share price1 pre and post-split

Rebased to 1 January 2007

Source: FactSet; Jefferies analysis 1 Synthetic share price is the price of a Cadbury Schweppes plc share up to the date of the split in April 2008. Post the split it is the combined market cap of Cadbury plc and the spun-out Dr. Pepper Snapple Group, divided by the old Cadbury Schweppes share count

The Cadbury case if of anecdotal value only. Two ‘meta’ studies of the value from splits of

various kinds from leading consulting firms have come to our attention.

The first, from the Boston Consulting Group in September 2014, looked at short term

market reaction to trade sales, spin-offs and carve-outs5. This was based on analysis of

around 8,000 deals in the US since 1990.

Exhibit 34: BCG’s study of near term market reaction to separations

Cum. abnormal

return1

% of deals with

positive share price

reaction

Trade sales 1.3% 54%

Spin-offs 2.6% 59%

Carve-outs 1.2% 53%

Source: Boston Consulting Group 1 Cumulative abnormal return relative to the market over a seven-day window centred around the announcement date

Exhibit 35: Bain’s study of longer-term market reaction to spin-outs

Top third 56%

Middle third 0%

Bottom third (44%)

Simple average 4%

Source: Bain & Company

The key conclusion from BCG is that while market reactions to separations were generally

positive, the near term share price benefit was small. The second study, from Bain and

Company, assessed 40 transactions in the US with values of over $1bn, across a range of

industries and on an 18 month timeframe post-deal. This suggested that the most

successful transactions generated returns similar to Cadbury, in excess of 50%. However

the least successful deals destroyed value. While the net result was a modest positive, the

inference is that any separation has to make strategic and economic sense.

5 A carve out is a full or partial IPO of a separated business rather a pure spin. Carve-outs have

the advantage of bringing capital back to the parent, but often attract tax liabilities

400

450

500

550

600

650

700

750

800

850

900

Jan

-20

07

Feb

-20

07

Mar-

20

07

Ap

r-2

00

7

May-

20

07

Jun

-20

07

Jul-

20

07

Au

g-2

00

7

Sep

-20

07

Oct

-20

07

No

v-2

00

7

Dec-

20

07

Jan

-20

08

Feb

-20

08

Mar-

20

08

Ap

r-2

00

8

May-

20

08

Jun

-20

08

Jul-

20

08

Au

g-2

00

8

Sep

-20

08

Oct

-20

08

No

v-2

00

8

Dec-

20

08

Jan

-20

09

Feb

-20

09

Mar-

20

09

Ap

r-2

00

9

May-

20

09

Jun

-20

09

Jul-

20

09

Au

g-2

00

9

Sep

-20

09

Oct

-20

09

No

v-2

00

9

Dec-

20

09

Jan

-20

10

Absolute Relative to FTSE 100

Announces split, following activist pressure Split occurs

Strong maiden results from Cadbury plc

Kraft bid for Cadbury plc

Meta-studies from two leading

consulting firms have pointed to

positive, but smaller, returns from

splits of various kinds

UNA NA


15 March 2017



Material potential upsides for ULVR from enhanced valuation perception, prior to any costs We are strongly of the view that ULVR would be valued more highly by the market if it

was split into more logical and coherent component parts. There should therefore be

material positive benefits to offset the costs of any separation.

ULVR’s capital allocation under CEO Paul Polman has been strongly in favour of

Household and Personal Care (HPC). Since 2009, ULVR has added around €1.9bn of sales

from acquisitions. This is the net of €3.2bn of acquired Personal Care sales, around €450m

each of Home Care and Refreshment sales less €2.2bn of divested Foods turnover.

Exhibit 36: ULVR’s Cumulative M&A history under Paul Polman

Cumulative sales value of deals in €m at current exchange rates

Source: Unilever; Jefferies analysis & estimates

The effect has been to transform ULVR into an overtly HPC-led business, strongly

weighted to Emerging Markets (EM’s). We think that around 45% of Group EBITDA arises

from EM’s as a whole and that just over 30% of Group EBITDA arises from HPC in EM’s.

The message from peer group valuations is that the capital markets tend to value this sort

of exposure very highly. HPC companies that are geographically diversified tend to trade

on substantial valuation premia to Foods companies, whether diversified or not. Emerging

Market subsidiaries of multinationals like ULVR & NESN trade on exceptionally high

valuations, close to 30x EBITDA in fact. Relative to which ULVR was trading on less than

14x EBITDA before KHC came along.

€30m

€240m€70m

(€35m)

(€460m)(€90m)

€750m

(€190m)

€1520m

€95m

(€50m)

(€80m)

€210m€70m

(€290m)

(€350m)

€50m

(€75m)

(€180m)

€40m

(€40m)

(€100m)

€140m

(€570m)

(€95m)

€110m

€210m

€230m

€190m€30m

€150m

€100m

€190m

€1860m

Expansion into Mass Personal Care: Alberto &

Sara Lee

Foods disposals, principally NorthAm

Personal Care & Refreshment

‘speedboat’ deals

FoodsRefreshmentHome CarePersonal Care

Under Paul Polman, ULVR’s portfolio

direction of travel has been

decisively towards HPC

ULVR is now a much more HPC-led,

EM-led entity as a result…

…in a world where HPC & EM pure

plays trade on much higher

multiples than ULVR

UNA NA


15 March 2017



Exhibit 37: Diversified HPC EV:EBITDA multiples

Prospective 12 months basis. Ex associates. As at 7 March


Exhibit 38: Developed HPC EV:EBITDA multiples

Prospective 12 months basis. As at 7 March


Exhibit 39: Diversified Foods EV:EBITDA multiples

Prospective 12 months basis. Ex associates. As at 7 March1

Source: FactSet; Jefferies analysis 1 Mead Johnson multiple is prior to RB offer on 1 Feb

Exhibit 40: Developed Foods EV:EBITDA multiples



Exhibit 41: Emerging Market & Asia EV:EBITDA multiples



16.5x15.8x

15.0x 14.8x14.2x

12.9x

Colgate RB P&G Beiersdorf L'Oreal Henkel

15.4x14.4x

12.1x11.5x

Church & Dwight Clorox Newell Brands Edgewell

14.5x

12.7x

12.2x

Mead Johnson Nestle Danone

16.4x

14.1x13.1x 12.8x

11.6x

9.0x

Kraft Heinz Hershey Kellogg's General

Mills

Campbell's Premier

Foods

31.6x

27.5x26.3x

13.0x 12.3x10.5x

9.4x7.6x

4.9x

ULVR

Indonesia

HUL NESN India Shisheido Oriflame Kao Grupo

Bimbo

Tingyi JBS

UNA NA


15 March 2017



We think that the market would be prepared to value a purer play ULVR HPC business,

with its associated strong EM orientation and strong leadership positions in markets like

Brazil, India and Indonesia, very highly. We also think that the market might be inclined to

put a higher value on the more on-trend and geographically mobile components of

ULVR’s Foods business. On the other hand we think that ULVR’s Spreads business would

attract a much lower multiple (we have previously argued 9x EBITDA).

Exhibits 43 & 44 attempt what we think would be a fair sum-of-the-parts valuation for

ULVR assuming that the market was able to value and invest in the component parts in a

more segmented way. This points to fair value of over 16x our estimate of FY18 EBITDA.

Exhibit 42: Estimated ULVR EBITDA per category and broad region

Based on FY18E, in €m

Spreads Other

Foods

Refresh-

ment

Personal

Care

Home

Care

Total

Developed Markets 420 1570 1030 2500 500 6030

Emerging Markets 170 600 800 2490 1180 5230

Total 590 2170 1830 5000 1680 11260


Exhibit 43: ULVR target EV:EBITDA multiples per category and broad region

Spreads Other

Foods

Refresh-

ment

Personal

Care

Home

Care

Total

Developed Markets 8.0x 12.0x 11.0x 13.0x 11.0x 11.9x

Emerging Markets 11.5x 16.0x 21.0x 23.0x 21.0x 21.1x

Total 9.0x 13.1x 15.4x 18.0x 18.0x 16.2x


After allowing for net debt and pension liabilities, and adjusting for associates and

minorities, such a valuation would imply a fair value for ULVR of over €55 per NV share,

relative to €45 now. More than a 20% upside, even to today’s already elevated price.

This isn’t in our view the fair value that ULVR is likely to achieve in the market any time

soon, even under a separation scenario. While we think our target valuation methodology

is well-grounded, direct peer benchmarks are limited and it’s ultimately hard to value

ULVR with precision. Critically, if they are going to set off in pursuit of an aspirational

€55+ valuation, ULVR are going to have to incur some cost, and take some risk, to get

there. This trades off against the upside.

What this cost and risk is depends acutely on the costs of delivering a separation as

implied by the Exhibits above and the challenge of separating the business in a manner

that might hope to attract a higher valuation. So let’s move next to the physical and

financial practicalities of separating ULVR. We think these look different between

Developed and Emerging Markets.

Still unconvinced by the synergy arguments in Developed Markets ULVR’s Developed Markets business accounts for just over 40% of its sales and, we think,

just over half of its profits.

Category participation and the supply chain across Developed Markets are varied and

complex. So to focus the analysis on something more tractable, we again propose to the

use the UK as a case study of how separation might work. We think this is fair given that

the UK is ULVR’s second largest Developed Market (after the USA), with c.5% of Group

sales, and is a market that reflects a wide base of participation across Foods & HPC.

We think that a fair SOTP value could

see ULVR trading on 16.2x FY18

EBITDA. This would equate to €55

per NV share

But there would be significant cost

and risk to getting there

We return to the UK as a case study

for splitting ULVR in Developed

Markets

UNA NA


15 March 2017



UK case study: largely un-integrated other than back office?

ULVR has been in the UK for over a hundred years and has deep roots in the market. As we

have noted above, the operational model in the UK was extensively restructured in the

2007-2009 period as ULVR combined what had been three principal operating companies

into one. Subsequently, in 2015, the Margarines business was unbundled into the new

BCS operation, based in Purfleet, reputedly the world’s biggest margarine plant.

However what is apparent from a more detailed study of the market is that ULVR’s UK

supply chain, which represents the vast bulk of its assets, remains largely un-integrated

across categories. There is one semi-integrated facility, Port Sunlight. This is ULVR’s

spiritual home and a dedicated Home Care plant until it took on some former Alberto and

Sara Lee production on the closure of their facilities in 2012. Aside from that all

manufacturing is dedicated to one of ULVR’s four principal categories.

Exhibit 44: ULVR in the UK

Principal locations including headcounts & capacities where known


Moving to distribution and warehousing, ULVR have one integrated facility in the form of

its combined Ambient Grocery (Foods) and Home Care Distribution Centre (DC) at

Cannock. Personal Care and Spreads operate from separate DC’s, both from each other

and from the Grocery & Home Care DC.

Mustards& condiments

Norwich

Spreads DCThurrock

Refreshment

Home Care

Personal Care

Foods

Shared

Key

Factory

Distribution Centre (DC)

SpreadsPurfleet200 FTE

180k tonnes

Pot NoodleCrumlin

15k tonnes

MarmiteBurton

6k tonnes

Ice CreamGloucester

500 FTE80k tonnes

Head OfficeLeatherhead

1750 FTE

Ambient Foods& Home Care DC

Cannock

Personal Care 2 DCDeeside

Personal Care 1 DCDoncaster

DeodorantsSeacroft

TeaTrafford Park

Home & Personal CarePort Sunlight

2000 FTE

Home CareWarrington

ULVR UK was extensively

restructured and optimised in 2007-

2009

Despite this manufacturing is not

integrated across categories

Warehousing and distribution is only

partly integrated

UNA NA


15 March 2017



Where ULVR in the UK is integrated is in its Head Office in Leatherhead, purpose-built and

commissioned in 2008. Leatherhead accommodates some 1750 heads according to

recent planning filings, around 350 of which are in ‘administration’ according to

Companies House filings.

We would imagine that these 350 admin heads are in back office functions like Finance,

HR & IT. So by inference around 1400 heads are in market-facing functions like sales and

marketing.

Separation in the UK un- problematic, with scale diseconomies limited

What might happen in the UK if ULVR was to separate, into a Foods and HPC business for

the sake of argument?

We see no implications for manufacturing, as the only integrated facility is for HPC.

Distribution is also largely separate, save for the integrated Foods & Home Care facility at

Cannock. ULVR will benefit from some minor site-level scale economies there, but we

suspect that the bulk of the cost of a DC is in its picking operations. It’s difficult to explore

ULVR’s distribution cost economics from the outside. However a very clear insight into

what these might look like is provided by the structure of ULVR’s UK terms of trade, which

are in the public domain.

ULVR, like their peers, offer fixed discounts off invoice for items like Early Payment and

Electronic Ordering. These discounts are small (less than 1% off the invoice value) and are

business-level issues. The principal terms offered by ULVR are Logistics Efficiency Terms

(LET) which offer discounts of up to 3% off-invoice. The structure of these terms are

complex, but in essence they offer the customer an incentive to order full pallets of the

same SKU Stock Keeping Unit.) Interestingly there is no discount for overall scale or

average order size across all SKU’s.

The inference we would draw is that the bulk of ULVR’s distribution efficiencies arise at the

individual SKU level (because bulk orders of the same SKU are easier to pick, load and

unload). So there would appear to be no returns to multi-category scale (because that

implies different SKU’s and indeed different supply chains) nor returns to overall account-

level scale, which are partly a function of being in multiple categories.

So the nub of challenge of separating ULVR in the UK would be at the white collar level,

out of Leatherhead. But again here observation and experience would suggest that many

commercial roles are category facing. Brand management is by definition and we would

also imagine that many junior and mid-level sales roles are similar. So the inseparabiltiies,

and resultant diseconomies of scale, would be confined to senior management and the

back office.

It’s hard to quantify what these might be but let’s have a stab. If the UK’s SG&A cost to

sales ratio is the same as the group average, 13%, then the inference from the admin

headcount relative to total headcount at Leatherhead is that about a quarter of heads are

back office. Senior management roles would add a few more heads to this but

significantly more cost. So it feels like maybe a third of admin cost (c.4% of sales) of

indivisible. This feels like a fair number as, looking at it the other way round, guided

merger synergies for companies looking to eliminate SG&A tend to be of a similar

quantum.

If ULVR was to split, this cost would need to be duplicated, implying a 4% penalty. But we

doubt that the ultimate impact would be that severe, despite the apparent diseconomy of

scale. Smaller, more focussed companies tend to find smarter ways of doing things. And

there should be offsetting revenue benefits from increased focus and greater

accountability. So any value destruction should be a relatively small percentage of sales.

Only the back office is integrated

ULVR UK trading terms suggest

strongly that returns from multi-

category scale in the supply chain

are low to non-existent

The implication is that any cost

synergies are limited to white collar

headcount

We think that any scale diseconomy

would be a low single digit

percentage of sales

UNA NA


15 March 2017



But Emerging Markets more complicated In contrast to Developed Markets, we think that separation in some Emerging Markets

would present more of a challenge and result in a higher level of value destruction. The

key issue is different retailer structures and what this means for distribution economics.

Foods and Refreshment categories are less germane to overall scale in Emerging Markets

than they are to Developed. We estimate that Foods and Refreshment account for just

over half of ULVR sales in DM’s, but only a third of sales in EM’s. In ULVR’s two big Asian

markets, India & Indonesia, Foods & Refreshment account for less than a quarter of sales.

Exhibit 45: ULVR India profile

Source: Source: Jefferies estimates

Exhibit 46: ULVR Indonesia profile

Source: Jefferies estimates

Exhibit 47: ULVR LatAm profile

Source: Jefferies estimates

This relative low significance to overall scale of Foods and Refreshment might suggest that

separating the two halves of the business would be a simpler and less emotive issue than

it would be in Developed Markets. But the complication is the low incidence of the

‘Modern Trade’ (Supermarkets) in certain key ULVR territories like India and Indonesia.

Exhibit 48: Penetration of Modern Trade

% of Grocery sales in Modern Trade. Markets >5% ULVR sales in blue

Source: Kantar; Bain & Company

In markets like India, low population density and low urbanisation, plus low levels of car

ownership, makes the Supermarket model unsuitable. The consequence is that the

Modern Trade in India is edging into a double digit share of Grocery only slowly, in

contract to the >70% share it enjoys in Developed Markets. This has major implications for

selling and distribution in these markets, in that there are a large number of retail outlets

Laundry

48%

Personal

Care

26%

Exports

& other

12%

Tea 11%

Ice

Cream

2%

Bakery

1%

HPC

73%

Foods &

Refresh

27%

Foods

36%

Personal

Care

32%

Home

Care

24%

Ice

Cream

8%

89%84%

81%

72% 71%68%

58%53%

48% 48%41% 41%

28%

19% 18%12%

Separation in EM’s would be more of

a challenge given distribution

economics

The key issue is retail channel

concentration and sophistication

Some big ULVR EM markets have

very fragmented retail channels

UNA NA


15 March 2017



to serve and dependence on extensive networks of intermediate wholesaler. The game is

therefore one of both filing the lorry and maximising the value of a sales call. Both of these

are returns to national scale, which in turn favours a multi-category presence. The

competitive advantage conferred by distribution returns to scale explains why ULVR can

be #2 in Coffee to Nestle in India, when they have virtually no presence anywhere else.

India case study: manufacturing separability, distribution complexity

Diving deeper into India, ULVR’s second biggest market worldwide in accounting for c.8%

of Group sales, offers further insight into the issue.

Just as in the UK, manufacturing is largely un-integrated. Of the 23 ULVR manufacturing

locations in India that we can identify, none manufacture more than one category.

Exhibit 49: ULVR manufacturing plants in India

Source: Business Standard; Jefferies analysis

But the sheer scale and complexity of India’s retailing and wholesaling landscape makes

for a much more complex picture at the distribution level. ULVR are reaching 2m out of

India’s 7-8m retail outlets via network of 7,000 wholesalers.

Exhibit 50: Landscape of Indian urbanisation, retail universe & ULVR reach

Number of:

Metropolises 6

Cities 438

Towns 5,500

Villages 600,000

ULVR reach

Total retail outlets c.8m

Reached by ULVR direct & indirect distribution 7m

Reached by ULVR direct distribution 3.2m

ULVR perfect stores >1m

ULVR wholesalers 7,000

Shakti participants >70,000

Source: Hindustan Unilever; LiveMint; Jefferies analysis

Soaps & detergents

Ice Cream

Foods

Tea

Personal Care

Fine chemicals

Water purifiers

Coffee

Household Cleaners

We case study India, ULVR’s second

biggest market

ULVR reaches some 7m retail outlets

in India

UNA NA


15 March 2017



To be able to ‘go deep’ into the highly fragmented distribution base means that a sales

call or a delivery drop needs to be economic down to very low levels of sales per outlet –

much, much lower than would be encountered in a Modern Trade-led Developed Market

which relies on direct distribution to the retailer’s warehouse. We estimate that the

average ULVR served outlet has sales of ULVR products at MSP of only around $40 per

week. So the average outlet contributes less than $20 a week to ULVR’s cost base.

Exhibit 51: Outlet sales coverage across major Indian CPG players

m outlets covered

Source: Jefferies India estimates

The key to how ‘deep’ ULVR can go – and by the same token any value destruction as the

result of de-scaling in the market – is the ‘concentration curve’ of retail outlets. We don’t

know what this looks like in India, but can make some informed speculations based on

what little data we have, plus judgement and experience.

Exhibit 52: Distribution economics in India

Speculative outlet level concentration curves


We hypothesise in Exhibit 53 that the biggest Modern Trade outlets in India have

contribution per outlet many times bigger than the smallest ones (the chart suggests 10x

bigger for visual clarity. In practice the multiple will be much larger). We would expect

the concentration curve to fall quite sharply as one travels down the independent urban

trade and then to have a ‘long tail’ of small (often tiny) rural outlets.

0

2

4

6

8

Colgate Emami Godrej ULVR Marico NESN ITC

Direct Indirect Total

0

10

20

30

40

50

60

70

80

90

100

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Sa

les

pe

r o

utl

et

Cumulative outlets

Now Ex. Foods Ex. Refreshment

Outlet cost to serve under direct model

Outlet cost to serve indirect

Moderntrade

Urbantrade

Ruraltrade

We think that the average outlet in

India contributes c.$20 per week to

ULVR’s cost base

The implication is that distribution

‘depth’ in the market is a function of

scale

UNA NA


15 March 2017



In reality, ULVR in India has a many-layered sales and distribution model that depends on

7,000 principal redistribution stockists and a much larger network of Rural Distributors,

each of which serves 15-20 rural sub-stockists each. For simplicity we confine our

hypothesis to two models: the ULVR salesman-led direct model and the distributor-led

indirect model. The latter is supported in part by ULVR’s well-known ‘Shakti’ programme.

This embraces networks of ‘shakti ammas’ (rural village women) and ‘shaktimaans’

(usually their husbands), who sell small quantities of ULVR products on foot (within a

single village) and by bicycle (across a wider area) respectively. Let’s hypothesise that

provisioning the indirect model has half the cost-to-serve of the full-service model (in

practice it’s probably a lot less.)

In our hypothetical model, the indirect model allows ULVR at its current scale to penetrate

down the 60th percentile outlet by size (red line). But if ULVR de-scales in any separation

scenario, this level of penetration will fall. Exiting Foods would make relatively little

difference but exiting Refreshment (green line, which is principally tea) would have bigger

impact. It all depends on the steepness of the concentration curve but in our hypothetical

example an exit from Foods & Refreshment would cap economic distribution at around

the 30th percentile outlet – a big difference. So separation would impact ULVR’s revenues

(via reduced sales presence and availability), margins (due to higher costs to serve) as well

as lowering the distribution barrier to entry for competitors. Clear value destruction.

We don’t have the data to take the argument any further but see the impact of de-scaling

in Emerging Markets with small Modern Trades as potentially significant, and a resultant

barrier to a clean break from Foods and/or Refreshment.

But we also urge a sense of proportion. Markets where the Modern Trade accounts for

less than half of Grocery sales probably account for less than 25% of ULVR’s Group sales.

Major Emerging Markets like Brazil and China6 have well-developed Modern Trades that

are growing their share. The rise of e-commerce will reduce the distribution barrier to

entry over time. Finally, in markets like India and Indonesia an exit from Foods would be

much less destructive than an exit from Refreshment.

Under a split, or perhaps even a sale, scenario it might even be possible for ULVR to

minimise value destruction by forming a distribution JV with the successor business a la

Diageo & Heineken’s brandhouse JV in South Africa. So there are options, as well as

complications.

Options for a split: Gradations of Foods, DM’s vs. EM’s. The question of Refreshment What does ‘splitting’ ULVR mean practically, assuming that it is strategically and

economically desirable?

The market’s knee-jerk scenario, and indeed this analyst’s general view over the years, has

been that ULVR should split itself into a ‘Foods’ and ‘HPC’ business. The former would be

a low growth, high margin, cash generative entity that generates income for shareholders,

while the latter would be a high growth, medium margin investment vehicle.

In reality there are gradations and variations of possibility under the broad rubric of ‘Foods

vs. HPC.’ Foods is far from a homogenous category. And then there is the question of

ULVR’s ‘Refreshment’ business, a combination of Ice Cream and Tea.

6 We would speculate that ULVR’s relatively late entry into China (actually re-entry) means that

the Modern Trade as a % of ULVR sales is much higher than the 41% national average

The value of scale depends acutely

on the shape of the outlet

‘concentration curve’

We think that distribution scale

diseconomies in markets like India

would be significant

But also counsel a sense of

proportion: relatively few EM’s have

small Modern Trades and there may

be mitigating options

Splitting ULVR isn’t just a simplistic

‘Foods vs. HPC’ decision. In reality

there are gradations of choices

UNA NA


15 March 2017



The complexity of Foods

Foods for ULVR is a complex, fragmented category comprising many brands. The origins

of the Division reside in the formative Margarine Union business in Holland (one of the

two forerunners of ULVR, along with Lever Brothers in the UK) plus the BestFoods business

acquired in 2000, which brought with it Knorr, Hellmann’s and others.

The majority of ULVR Foods brands by number are strongly local and/or regional in

character. Genuinely global brands in the Division are confined to Knorr,

Hellmann’s/Calve, Flora/Becel and Rama/Blue Band. The consequence is that most ULVR

Foods brands are below the radar of the market, but represent strong local franchises with

resultant contribution to national scale and value: ‘local jewels’ as they have been referred

to in the past. A good example is Maizena, a brand of corn starch that enjoys a strong

franchise in both Northern Europe and Latin America, but which is little known elsewhere.

Exhibit 53: Landscape of ULVR’s Foods business, including representative brands

Sales reflects FY15 disclosures

Source: Company data; Jefferies analysis & estimates

Foods for ULVR therefore resolves into three principal Divisions: Spreads (margarines) with

a turnover of c. €3bn, Savoury (Knorr et al) with turnover of nearly €6bn and Dressings

(Hellmann’s) with a turnover of nearly €4bn.

So splitting or focussing the Foods business isn’t just a binary decision. The market wants

to see Spreads gone, but the consequence would be material loss of scale in Northern

Europe and procurement diseconomies with Dressings. If Foods is exited wholesale, then

ULVR waves goodbye to nascent global brands with growth potential in Emerging

Markets, principally Knorr.

Regular€1.7bn

Heart Health€1.2bn

Bouillons, seasonings &

soups€2.9bn

Meals, side dishes & sauces€1.8bn

Other savoury€1.1bn

Mayonnaise€2.4bn

Other dressings€1.2bn

Spreads€2.9bn

Savoury€5.8bn

Dressings€3.6bn

Unilever Foods€13bn

Other€0.7bn

ULVR’s Foods business comprises

three principal sub-divisions and

many brands

UNA NA


15 March 2017



The question of Refreshment

Refreshment often feels like ULVR’s Cinderella business: schizophrenic in character (Ice

Cream and Tea), capital- and labour-intensive (ice cream chillers and tea plantations) and,

in tea, ULVR’s arguably least glamorous and least well explained business, in our

experience.

Technically it’s a Foods business, but the key difference is that in Ice Cream ULVR have one

of their more global and richly innovative categories, with ‘Heart Brand’ (Wall’s to the

Brits) sold in over 30 countries and Magnum growing fast in over a dozen.

Tea can lay claim to one genuinely global brand, Lipton. But it also comprises many local

brands, many in India, what we think is ULVR’s biggest tea market. ULVR have been facing

major competitive challenges in tea, notably in the US (Twinings) and India (Tata).

But while Tea might look like a ‘bad’ business superficially, there would be consequences

from exiting here, too. As we have just argued above, it would de-scale ULVR in critical

markets like India. Beyond India, black tea is becoming a hot space in the global foods

industry given tea’s health and wellness properties, with ULVR making a significant

investment behind rolling out it’s acquired premium tea brand, T2. There is also the

complication of the Pepsi Lipton JV in iced tea.

Appraising the split options

Bringing this all together, there seem to us to be six logically coherent options for splitting

or spinning some combination of ULVR Foods & Refreshment businesses.

The first, most extensively discussed and most do-able is to exit Spreads. We assessed this

option extensively in a previous note, ‘Looking for Some Sunlight Over The Wirral,’ 25

November 2016 and concluded that:

Spreads is a highly separable business

But there are few obvious strategic buyers, suggesting that a spin-out or carve-

out would be the most viable exit option.

A speculative spin scenario at 9x EBITDA and 2x net debt:EBITDA would create a

business worth around €1.60 per ULVR share, trading on a PER of c.12x and

yielding nearly 5%.

Our judgement remains that presenting such a business to the market in a

separate listing would be problematic for the time being given strongly negative

top line growth rates

Looking beyond Spreads, we see five further options, the materiality, pros and cons of

which we set out in Exhibit 55.

The incremental step from exiting Spreads would be exit both the Spreads and Dressings

business, a €6.5bn sales entity. Bundling Dressings with Spreads would add some top line

fizz to the proposition and there will be operational and procurement synergies around

edible oils. According to reports in the Financial Times (FT) Alphaville column in June

2010, ULVR contemplated selling Spreads and Hellman’s as a precursor to acquiring

Reckitt Benckiser. The downside of such a transaction is that it would leave behind a

rump, sub-scale, Foods business.

If ULVR conclude that there is value from multi-category scale in Emerging Markets and

that there is genuine growth potential from global brands such as Knorr, then a logical

move strategically would be to exit the Developed Markets Foods business. The offsetting

complication would be that the Knorr brand (arguably ULVR’s most global Foods brand)

would be split, along with other multi-local brands like Maizena. So there would need to

be licensing or similar agreements in place with the successor owner of the Developed

Markets business. This feels difficult to us.

Refreshment has often felt like

ULVR’s Cinderella business to us

Ice Cream is more genuinely global

than Foods…

…while black tea is a hot space in

consumer terms while volume is key

in certain EM’s

The least radical cut would be to sell

or spin Spreads

Exiting Spreads & Dressings would

be the next most radical option

We see an exit from Developed

Markets Foods as difficult

UNA NA


15 March 2017



Exhibit 54: Strategic split options for ULVR in Foods & Refreshment

Source: Jefferies

The most radical options for ULVR would be to exit the Foods Division wholesale, or to

exit Foods & Ice Cream or Foods & Refreshment wholesale.

The principal incremental attraction would be to realise materially more value (and realise

a control premium if a sale) than by exiting Foods alone. This is relevant to an end game

of ULVR buying Colgate, which we discuss below.

But in any spin-out scenario ULVR wouldn’t be realising any premium but would be

destroying value via transaction costs, stranded costs and permanent diseconomies of

scale, as described at the opening of this section. So net value creation from such a move

would depend acutely on what a split entity could trade at in the market.

Limited upsides from here, once the costs and risks are properly weighed? If ULVR’s end-game is to buy Colgate, then we think they will need to raise capital by

selling assets, if they are to avoid issuing new equity. That would argue for a trade sale.

• Accretive to top line• Limited impact on overall scale,

particularly in EM’s

• A more sellable package than Spreads alone

• Procurement and operational synergies around edible oils

• Accretive to top line

• Avoids value destruction in EM markets with low Modern Trade

• Accretive to top line

• Above-average cash generation• Earnings-dilutive• Few obvious buyers

• Leaves behind a rump presence in Foods

• Earnings-dilutive

• Of questionable do-ability: Splits the Knorr brand and other minor brands: would require a licensing agreement

Potential value creation Potential value destruction

• Clean exit from the category• Accretive to top line• Of material scale and value

• Of material scale and value• Clear margin upsides in Ice Cream for

the right buyer

• Clean exit from any Foods• Of highly material value

• Earnings-dilutive• Some impact on overall scale in key

EM’s

• Earnings-dilutive• Not clear if there are buyers seeking

this combination of assets

• Loss of Tea impacts scale in India and other EM’s

€2.9bn

€6.5bn

€8.5bn

€13.0bn

€20.0bn

€23.0bn

Sales at stake

Spreads

Spreads & Dressings (Hellmann’s)

Developed Market Foods

All Foods

Foods & Ice Cream

All Foods & Refreshment

A wholesale exit from Foods or

Foods & Refresh would be the most

radical options

UNA NA


15 March 2017



The advantage of the former is that it is a simpler transaction and would crystallise a

control premium, which could then be re-invested in a control premium for Colgate.

But if the end game is not to buy Colgate (or indeed not to do any ‘megadeal’) then the

relevant end games are either for ULVR to maintain the broad status quo (on a margin and

balance sheet-optimised basis) or to sell or spin-out its non-HPC businesses.

If they want to do the latter, then they have the choice of either attempting to sell their

non-HPC businesses, spinning them out (via a tax-free distribution of shares) or carving

them out (via an IPO.) The most obvious buyer of ULVR’s Foods assets is KHC and we

think that ULVR would be nervous of bringing KHC back to the table other than under the

scenario of a back-to-back transaction to buy Colgate. So the distinct option that we want

to contemplate in this section is a spin-out.

Modelling two spin scenarios with a target multiple of 16.2x EBITDA

The rationale for a spin from a shareholder perspective is that ULVR should be able to

realise a higher valuation for the component parts than the integrated whole. Our

argument earlier was that a target multiple for ULVR based on a fair sum-of-the-parts

(SOTP) would be 16.2x EBITDA, relative to the current 15.0x.

As we have argued above, there would appear to be six principal split options available to

try to realise this value. For simplified modelling purposes, we analyse only two of these

options, spinning Foods or Foods and Refreshment. In any case we apply the limiting

assumption that any combination of spin is capable of realising our target SOTP

EV:EBITDA of 16.2x, so the value economics of any option are broadly similar.

Exhibit 56 provides an overview of the two spin options relative to our Base Case of an

optimised status quo, which resolves to €51.50 per ULVR share, or a TSR value including

normal dividend of €53 in round numbers on a 12 month horizon.

Scoping €10-12bn of offsetting value destruction

In line with our general analysis, we assume that any spin-out would incur one-off

transaction costs, the present value of stranded costs and the present value of permanent

diseconomies of scale.

We think that collectively these would destroy €10-€12bn of value (depending on the

option). This reflects transaction costs of 2% of spun revenues, stranded costs of an initial

3% of the sales of the spun business, falling to zero in 3 years, and permanent

diseconomies equivalent to 1% of the sales of the combined entities i.e. the current ULVR

Group.

It’s difficult to scope these offsetting costs with any precision, but we think it’s right to

reflect them. We note, for example, that the transaction costs in the Kraft/Mondelez split

(a smaller Group than ULVR) were over $1 billion.

The really big item is the PV of the scale diseconomies. We have observed above that

indivisible back office costs are c.4% of sales and that there would be material, hard-to

quantify, distribution diseconomies in markets like India. Against which separate more

focussed entities would have lower costs of co-ordination and, arguably, a tighter focus

on their respective cost bases. So a net 1% of total sales seems reasonable to us.

Scoping a special dividend of €2.75 per ULVR share

We think that under a spin scenario ULVR would give serious consideration to paying a

special dividend, funded by modestly re-gearing the split businesses. The rationale would

be to offer a degree of value certainty, reward investors for historic value creation and to

deliver the sought-after (in some quarters) enhanced cash return without an apparent

volte face on buybacks.

For illustrative purposes we assume aggregate gearing post-spin of 1.5x (relative to an

anticipated 0.8x in FY18 per our forecasts) with leverage loaded disproportionately onto

We model a pure spin as a distinct

end game option from selling and

then acquiring

We model a spin of Foods vs. Foods

& Refreshment for simplicity, both at

a target ‘unbundled’ multiple for the

Group of 16.2x

Relative to the gross valuation

upside, we think there would be

€10-12bn of value destruction to get

there

We think ULVR might consider

paying a special dividend on a split.

We model €2.75 per share

UNA NA


15 March 2017



the spun-out Foods/Foods & Refreshment entity. This would generate a Special Dividend

of €2.75 per ULVR share.

Limited upsides relative to our base case

Exhibits 56, 57 and 58 present respectively a summary of our two spin scenarios and a

more detailed P&L and ratio analysis for each scenario individually.

Our spin scenarios deliver broadly similar value to our base case on a TSR basis including

dividends i.e. no further upside. This is because value destruction from the transaction

and the impact of higher leverage on the PER offsets the higher projected Enterprise

multiple. Given that incurring the transaction costs is relatively more certain than

obtaining the projected valuation, the conclusion is that it would be risky for ULVR to try

to create value from a spin relative to the alternative of optimising the status quo.

Exhibit 55: Overview of spin-out scenarios relative to the base case

Based on FY18 forecasts and relative to the NV share price on 10 March

Base case Spin out

Foods

Spin out

Foods

& Refresh

Target EV:EBITDA 15.2x 16.2x 16.2x

Gross EV of subsidiaries 171106 181823 181823

Add associates at fair value 3100 3100 3100

Gross EV of Group 174206 184923 184923

Deduct costs of separation:

Transaction costs (2% of spun revenues) (640) (1168)

PV stranded costs (3% spun sales yr. 1, 0% yr. 3) (819) (1484)

PV permanent diseconomies @ 1% of sales (9497) (9497)

Sub-total costs of separation (10956) (12149)

Net EV 174206 173967 172774

Deduct net debt (8153) (16004) (16004)

Deduct pension deficit (2632) (2632) (2632)

Deduct value of non-controlling (16311) (16311) (16311)

Equity value 147110 139020 137827

NV equity value per share 51.52 48.69 48.27

EPS 2.34 2.13 2.13

Implied PER 22.0x 22.8x 22.6x

Normal dividend 1.44 1.44 1.44

Special dividend 2.75 2.75

TSR value 52.96 52.88 52.46

TSR % 16% 16% 15%


Exhibit 56: Scenario summary for a Foods spin-out

Based on FY18 forecasts

Foods HPC &

Refresh

Total

Key metrics

Sales 13649 45148 58797

EBITDA 2619 8050 10669

Core Profit 2332 6934 9267

EPS per ULVR share (cents) 53.3 160.1 213.4

Prospective organic sales growth 2.7% 4.4% 4.0%

Core profit margin 17.1% 15.4% 15.8%

EV subsidiaries 32007 140316 172322

JV's & Associates 0 3100 3100

Total 32007 143416 175422

Neither of our spin scenarios offer

much upside to our stand-alone base

case, when costs as well as benefits

are factored in

UNA NA


15 March 2017



Exhibit 56: Scenario summary for a Foods spin-out


Foods HPC &

Refresh

Total

Less non-controlling 0 (16311) (16311)

Less net debt (5500) (10504) (16004)

Costs to achieve (271) (1188) (1459)

Pension deficit (489) (2143) (2632)

Equity value 25747 113270 139017

Equity value per ULVR share 9.02 39.67 48.69

Key ratios

EV:EBITDA 12.2x 17.4x 16.2x

Net debt:EBITDA 2.1x 1.3x 1.5x

PER 16.9x 24.8x 22.8x

Div yield 3.5% 2.4% 2.9%

FCF yield 5.4% 3.9% 4.2%


Exhibit 57: Scenario summary for a Foods & Refreshment spin-out


Foods &

Refresh

HPC Total

Key metrics

Sales 24734 34063 58797

EBITDA 4337 6332 10669

Core Profit 3585 5682 9267

EPS per ULVR share (cents) 81.3 132.1 213.4

Prospective organic sales growth 3.1% 4.6% 4.0%

Core profit margin 14.5% 16.7% 15.8%

Valuation logic

EV subsidiaries 58399 113924 172322

JV's & Associates 0 3100 3100

Total 58399 117024 175422

Less non-controlling 0 (16311) (16311)

Less net debt (9000) (7004) (16004)

Costs to achieve (899) (1753) (2652)

Pension deficit (892) (1740) (2632)

Equity value 47608 90216 137824

Equity value per ULVR share 16.67 31.59 48.27

Key ratios

EV:EBITDA 13.5x 18.0x 16.2x

Net debt:EBITDA 2.1x 1.1x 1.5x

PER 20.5x 23.9x 22.6x

Div yield 3.0% 2.4% 3.0%

FCF yield 4.7% 3.9% 4.2%


UNA NA


15 March 2017



Acquiring Colgate We have identified the vision of building a New World Order in HPC as a potential end-

game for ULVR in Exhibit 4 of this note. We think that the most effective route to realising

such an end-game would be to buy Colgate.

As long ago as February 2011 Forbes were speculating that ULVR might move for Colgate

as a route to delivering its Compass goal of doubling sales. Speculation around a bid has

rumbled around the market ever since. This has reached a fresh crescendo since the KHC

move for ULVR.

Despite this, we would view any announcement around a move for Colgate at ULVR’s

April review as highly unlikely. A move of this size would require months of planning and

evaluation and we judge it unlikely that any such plans were being made prior to

February 17. Neither is Colgate’s valuation premium to ULVR as attractive as it has been.

Finally, as we go on to argue, buying Colgate at acceptable levels of leverage would

mandate significant asset disposals by ULVR, if a dilutive equity raise is to be avoided. All

these factors say to us that now isn’t the moment to act precipitously, whatever pressure

ULVR might be under.

But if the acquisition of Colgate is indeed a desired end-game for ULVR, then the

implication for April is that ULVR won’t want to take any actions that would preclude such

an outcome. Given that we think any deal almost certainly requires offsetting and major

disposals, then this (plus the relative unattractiveness of a split) says to us that ULVR won’t

be proposing to spin-out its Foods and/or Refreshment business in April.

Put more plainly, if ULVR needs to pay a control premium for Colgate, it needs to retain a

control premium for now that it can sell to someone else.

Potential ULVR/CL combinations

We’ve assessed three scenarios under which Unilever could acquire Colgate:

Acquire Colgate with no ULVR disposals

Acquire Colgate with ULVR Foods disposal

Acquire Colgate with ULVR Foods and Refreshment disposals

In each scenario we have assumed that ULVR would exit Colgate’s Hill’s (Pet Nutrition)

business. ULVR growth and margin forecasts are as per our main model. We also reflect

scale diseconomies in scenarios where ULVR exits businesses.

Strong strategic logic Good strategic fit. Competition issues manageable

We have long been of the view that Colgate would represent an excellent strategic fit with

ULVR, for a number of reasons:

Colgate’s dominant position in Oral Care (46% of Colgate sales) remedies

ULVR’s principal strategic weakness in the broader HPC category.

Colgate’s secondary presence in categories like Laundry & Surface Care would

usefully remedy some areas of relative strategic weakness for ULVR in LatAm and

Australasia.

Colgate’s Emerging Market bias (51% of sales) complements ULVR’s and tees up

the prospect of an EM-led HPC powerhouse trading on a premium valuation

Relative to these attractions we see any competition/anti-trust issues around Colgate as

manageable. Acute competition concerns would we think be limited to Oral Care in parts

of LatAm, Deodorants in Western Europe and Laundry in Australasia.

We think Colgate represents the best

route to building a New World Order

in HPC

A ULVR/Colgate combination has

been speculated on for years

We think any announcement by

ULVR around Colgate in April is

highly unlikely…

…but think that ULVR won’t take any

actions in April that would preclude

such an outcome

We model three scenarios of a

Colgate take out

We continue to see Colgate as a

strong strategic fit with ULVR

We see any anti-trust implications as

manageable

UNA NA


15 March 2017



Exhibit 58: Market shares & impacts on concentration & competitiveness in major overlapping categories

Blue text indicates a material improvement in competitive position relative to P&G. Red text indicates a potential concentration problem

Resultant RMS1 to P&G

Unilever Colgate Unilever &

Colgate

P&G

(for ref)

ULVR stand-

alone

ULVR &

Colgate

Deos

World 35% 5% 40% 8% 4.3x 4.9x

Asia Pac 20% 1% 21% 2% 11.6x 12.1x

Australasia 65% 0% 65% 5% 13.9x 13.9x

Eastern Europe 23% 7% 30% 8% 2.9x 3.7x

LatAm 39% 4% 43% 4% 9.5x 10.5x

Middle East Africa 32% 5% 37% 4% 8.9x 10.3x

North America 34% 6% 41% 31% 1.1x 1.3x

Western Europe 38% 5% 43% 2% 17.2x 19.6x

Hair

World 14% 1% 16% 20% 0.7x 0.8x

Asia Pac 15% 1% 16% 23% 0.7x 0.7x

Australasia 16% 4% 20% 23% 0.7x 0.9x


LatAm 20% 4% 24% 17% 1.1x 1.4x


North America 17% 17% 22% 0.8x 0.8x


Skin

World 5% 5% 5% 1.2x 1.2x

Asia Pac 5% 5% 5% 0.9x 0.9x

Australasia 5% 5% 9% 0.6x 0.6x

Eastern Europe 9% 9% 1% 6.4x 6.4x

LatAm 7% 7% 0% 23.3x 23.3x

Middle East Africa 14% 14% 4% 3.3x 3.3x


Western Europe 3% 3% 3% 1.1x 1.1x

Oral

World 7% 27% 34% 19% 0.4x 1.8x

Asia Pac 9% 24% 33% 11% 0.8x 2.9x

Australasia 0% 46% 46% 14% 0.0x 3.2x


LatAm 6% 51% 57% 16% 0.4x 3.5x


North America 0% 18% 18% 34% 0.0x 0.5x


Laundry

World 15% 2% 17% 27% 0.6x 0.6x

Asia Pac 17% 1% 18% 15% 1.1x 1.2x

Australasia 27% 32% 59%

Eastern Europe 2% 2% 38% 0.1x 0.1x

LatAm 27% 4% 31% 20% 1.3x 1.5x




Surface

World 6% 8% 14% 11% 0.6x 1.3x

Asia Pac 4% 0% 4% 1% 4.4x 4.9x

Australasia 4% 20% 23%


LatAm 5% 20% 25% 2% 3.0x 15.6x


North America 0% 3% 4% 22% 0.0x 0.2x


Source: Euromonitor; Jefferies analysis 1. RMS (Relative Market Share) is the market share of ULVR or a ULVR combination relative to P&G

UNA NA


15 March 2017



Modelling a deal Valuation gap currently relative unattractive

CL is close to a peak valuation, reflecting in part bid spec subsequent to the ULVR/KHC

announcement, which put 4% on Colgate’s share price on the day. However even

without this Colgate’s premium to ULVR has been high by historic standards.

Exhibit 59: ULVR and CL PER since 2008

Prospective 12 months basis

Source: Factset: Jefferies analysis

Exhibit 60: Colgate PER premium to ULVR since 2008

Turns of PER. Prospective 12 months basis

Source: Factset: Jefferies analysis

Colgate, Unilever and Universal merger assumptions

Our base-case analysis is based on the following assumptions. We later provide

sensitivities on disposal multiples for Foods and Refreshment, as well as Colgate synergies.

Assessment of capital raise requirements required to stay within desired leverage (≤4.0x

net debt/EBITDA) is also included in our analysis.

Exhibit 61: Deal model assumptions

Colgate Unilever disposals Universal assumptions

Bid price ($) 90.00 Exit EV/EBITDA Synergies as % CL sales 8%

Offer equity ($bn) 79.4 Foods 11.0x1 Cost of net debt 4%

PER FY18 23.6x Refreshment 16.0x2 ULVR tax rate 26%

EV/EBITDA FY18 17.5x Foods and Refreshment 13.0x CL tax rate 31%

Hill's disposal Exit EV’s ULVR diseconomies on exits3 (1.0%)

EV/EBITDA 15.0x Foods (€bn) 30.3 Target leverage cap 4.0x

Exit EV ($bn) 11.8 Refreshment (€bn) 29.3 EURUSD 1.06

Foods and Refreshment (€bn) 59.6

Source: Jefferies estimates, company data 1,2 These multiples reflect a modest control premium over and above the organic multiples for ULVR Foods & Refreshment in Exhibit 43. 3 Applied to surviving ULVR sales where Foods and/or Refreshment are disposed

Colgate assumptions

A $90 bid price equates to a 30% premium to the undisturbed share price prior to 17

February (23% to spot), resolving to a 23.6x FY18 P/E and 17.5x EV/EBITDA. Our base case

assumption for Hill’s is a 15x exit multiple, resulting in an EV of $11.8bn (€11.1bn).

10x

12x

14x

16x

18x

20x

22x

24x

26x

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17

ULVR-GB CL-US

-1.0 x

0.0 x

1.0 x

2.0 x

3.0 x

4.0 x

5.0 x

6.0 x

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17

CL PE premium to ULVR 30 period average

The valuation gap between ULVR &

Colgate is currently wide

We model the deal on the basis of

detailed assumptions

We model $90 per Colgate share as

our central scenario

UNA NA


15 March 2017



Resultant accretion & impact on ULVR Implications on leverage and return

Potential ULVR disposals reduce EPS accretion, but the benefit is more sensible leverage.

There are also differential impacts on ULVR’s portfolio mix. Given the uncertainties, we

think it’s useful to model a range of possibilities and sensitivities.

Earnings accretion & valuation

Exhibit 63 sets out the key deal metrics across our principal scenarios.

Exhibit 62: Prospective integrated ULVR/Colgate FY18 P&L under different deal scenarios

Line item ULVR base All cash/no new

ULVR equity

4x leverage cap

new ULVR equity of 13%

of market cap

Exit

ULVR Foods

Exit ULVR

Foods & Refresh

Sales (€bn) 58.8 71.8 71.8 58.1 47.0

EBIT (€bn) 9.9 14.3 14.3 11.4 10.2

EPS (€) 2.34 2.97 2.75 2.40 2.34

Net Debt/ EBITDA1 0.7x 5.1x 4.0x 3.8x 1.6x

EPS accretion - 27% 17% 3% 0%

EV/EBITDA2 13.8x 13.8x 13.8x 14.9x 14.6x

PER1 19.6x 15.4x 16.6 19.0x 19.5x

Source: Jefferies analysis, company data 1 Excludes synergies i.e. peak leverage immediately post-deal 2 At current ULVR share price

The resulting ULVR+CL multiples of the combined entity vary depending on the multiples

achieved when selling Unilever’s Food and Refreshment Businesses (see exhibit 63).

Exhibit 63: ULVR Colgate Multiple sensitivities to Foods and Refreshment selling prices

Foods exit EV/EBITDA multiple 9.0x 10.0x 11.0x 12.0x 13.0x 14.0x

ULVR + CL multiple 15.3x 15.1x 14.9x 14.7x 14.5x 14.3x

Foods and Refreshment exit EV/EBITDA multiple 11.0x 12.0x 13.0x 14.0x 15.0x 16.0x

ULVR + CL multiple 15.4x 15.0x 14.6x 14.2x 13.8x 13.3x

Source: Jefferies estimates, company data

Colgate not realistically do-able for cash without offsetting disposals

Buying Colgate for cash with no offsetting disposals is the most straightforward scenario.

However net debt:EBITDA of 5.1x post-deal feels too high to us. The alternative scenario is

to complete the acquisition with an equity raise. We model a scenario where net

debt:EBITDA post-deal is capped to 4.0x. This would require ULVR to issue new equity

equivalent to 13% of its current market cap. Were ULVR Foods to be disposed, we think

the deal could be completed for cash – resulting in 3.8x leverage and 2.7% accretion.

Were Refreshment to be disposed of in addition to food, would be 1.6x with no accretion.

Towards a pure play HPC business

Exhibit 65 below shows the combined sales mix under each scenario, including the Oral

Care category. Acquiring Colgate with no offsetting disposals contributes 8pp of

incremental HPC sales (including Oral Care) on top of ULVR’s existing 58% (i.e. the

combined company would be 66% exposed to HPC). If ULVR exits Foods or Foods &

Refreshment, HPC rises as a proportion of sales to 81% and 100% respectively.

We project between 0% & 27% EPS

accretion depending on scenario

We think an all cash offer for Colgate

with no offsetting disposals would

be unrealistic

All scenarios would increase ULVR’s

exposure to the HPC category

UNA NA


15 March 2017



Exhibit 64: ULVR & Colgate combined sales profiles x category

% HPC sales: 58% 100% 66% 81% 100%

Source: Jefferies analysis, company data

Scenario impact on geographic mix

Turning to the impact on geographic mix, acquiring Colgate with no offsetting disposals

has no material impact on ULVR’s EM profile, reflecting Colgate’s broadly similar one.

Disposing of Foods and/or Foods and Refreshment would increase EM’s as a proportion of

sales to well over 60%.

Exhibit 65: ULVR & Colgate combined sales profiles x geography

% EM sales: 57% 56% 56% 65% 67%


Puts combined entity on a potentially compelling valuation

We think that a ULVR/Colgate combination could trade on between €53 & €56 per ULVR

NV share, depending on scenario. We regard these valuations as indicative only and they

do not determine our price target for ULVR.

Exhibit 66 sets out our assumptions, within which the critical ones are a fair EV:EBITDA

multiple for HPC (both ULVR & ex-Colgate) of 16.5x (equivalent to Colgate’s current

multiple) and a valuation of 11x EBITDA for ULVR Foods and 16x for Refreshment under

both retain and exit scenarios. An all-cash offer with no disposals is technically the value-

3%

55%

13% 16% 19% 23%

19%

19% 15%

19%

20%

22%

20%

25%

31%

35% 23%

33% 41%

50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Unilever Colgate (ex-Hills) No disposals Food Food +

Refreshment

Oral Care Foods Refreshment Home Care Personal care

27% 21%

26% 19% 17%

32%

18%

29% 37% 37%

19%

23%

20% 19% 19%

14%

31%

17% 20% 22%

8% 7% 8% 5% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Unilever Colgate (ex-Hills) ULVR & CL Exit Foods Exit Foods and

Refresh

Europe Asia NorthAm LatAm MEA

Exiting Foods would concentrate

ULVR’s EM exposure

We think that various ULVR/Colgate

combinations could trade

indicatively at €53-56 per ULVR share

UNA NA


15 March 2017



optimal solution from an equity point of view. However all scenarios are close and in

practice would need to be resolved on the grounds of strategic logic and the ultimate

values of any disposals.

Exhibit 66: Indicative valuation scenarios at $90 per Colgate share

All cash ULVR

Equity

Raise

Exit

ULVR

Foods

Exit ULVR

Foods &

Refresh

Target EV:EBITDA multiple

ULVR HPC 16.5x 16.5x 16.5x 16.5x

ULVR Foods 11.0x 11.0x 11.0x 11.0x

ULVR Refreshment 16.0x 16.0x 16.0x 16.0x

Colgate 16.5x 16.5x 16.5x 16.5x

CL Hill's Pet Nutrition 15.0x 15.0x 15.0x 15.0x

Synergies 16.5x 16.5x 16.5x 16.5x

Dis-synergies 16.5x 16.5x 16.5x 16.5x

Total 15.6x 15.6x 16.5x 16.6x

FY18E EBITDA

ULVR HPC 6673 6673 6673 6673

ULVR Foods 2755 2755

ULVR Refreshment 1829 1829 1829

Colgate 4557 4557 4557 4557

CL Hill's Pet Nutrition (743) (743) (743) (743)

Synergies 1150 1150 1150 1150

Dis-synergies 0 0 (516) (389)

Total 16221 16221 12950 11247

Valuation

ULVR HPC 110098 110098 110098 110098

ULVR Foods 30310 30310

ULVR Refreshment 29229 29229 29229

Colgate Hill's 75184 75184 75184 75184

CL Hill's Pet Nutrition (11140) (11140) (11140) (11140)

Synergies 18971 18971 18971 18971

Dis-synergies 0 0 (8509) (6420)

Enterprise Value 252651 252651 213832 186692

+ Associates 3100 3100 3100 3100

- Minorities (16311) (16311) (16311) (16311)

- Net debt (76686) (60284) (46376) (17113)

- IAS19 (2902) (2902) (2902) (2902)

Equity value 159852 176254 151343 153466

No ULVR shares 2,855 3,214 2,855 2,855

Value per NV share 55.98 54.84 53.00 53.75

EPS 2.97 2.75 2.40 2.34

PER 18.9x 20.0x 22.1x 23.0x

Net debt/EBITDA1 5.1x 4.0x 3.8x 1.6x

Source: Jefferies analysis 1 Excludes synergies i.e. peak leverage immediately post-deal

No ULVR disposals sensitivity analysis

As we have observed, an outright purchase of Colgate without offsetting disposals would

lead to what we think would be an unsustainable level of leverage. Thus we would see

the requirement for an equity raise. Our base case assumption of a $90 bid implies 26% of

the offer would need to be equity, equating to €16.4bn, or c. 13% of ULVR’s market cap.

Capping leverage and with no

disposals implies progressively more

dilution for ULVR shareholders

UNA NA


15 March 2017



Exhibit 67: Sensitivity of capital structure & EPS accretion to Colgate offer price, constrained to 4x net debt:EBITDA

Offer price per CL share ($) $85.00 $90.00 $92.50 $95.00 $97.50 $100.00

Cash portion (€m) 47,344 47,344 47,344 47,344 47,344 47,344

Cash % of offer 79% 74% 72% 70% 68% 66%

Equity portion (€m) 12,242 16,403 18,483 20,563 22,643 24,723

New ULVR equity % of Colgate offer 21% 26% 28% 30% 32% 34%

New ULVR equity % of ULVR market cap 9% 13% 14% 16% 17% 19%

Share issued (m) 268 359 404 449 495 540

EPS (€) 2.83 2.75 2.71 2.67 2.64 2.60

EPS accretion 21% 17% 16% 14% 13% 11%


The €16.4bn could also come via disposal of select assets. Exhibit 68 below provides some

analysis of how much of ULVR’s sales would need to be sold to achieve that, with some

sensitivities provided around exit multiples.

This implies anything from 10-20% of ULVR’s sales would need to be disposed of to avoid

an equity raise being required to keep leverage at 4.0x.

Exhibit 68: Disposals required to lower leverage to 4x (i.e. raise €16.4bn)

Exit EBITDA multiple EBITDA Implied sales at

18% margin

% ULVR sales

8.0x 2,050 11,391 19%

9.0x 1,823 10,125 17.2%

10.0x 1,640 9,113 15.5%

11.0x 1,491 8,284 14.1%

12.0x 1,367 7,594 12.9%

13.0x 1,262 7,010 11.9%

14.0x 1,172 6,509 11.1%

15.0x 1,094 6,075 10.3%

Source: Jefferies analysis

Colgate plus ULVR Foods disposal sensitivity analysis

An acquisition could be made all cash under most cases where ULVR disposes of its Foods

business without leverage exceeding 4.0x. Our base case assumptions outline a $90 offer

for CL and a Foods exit multiple of 11x, resolving to the leverage (3.8x) and accretion

(c3%) highlighted below. Numbers marked red show where equity raises would be

required in order to maintain 4.0x leverage.

Capping leverage to 4x with no

equity issue would require the

disposal of 10-20% of ULVR sales

Disposing of ULVR Foods would

facilitate the acquisition of Colgate

for cash

UNA NA


15 March 2017



Exhibit 69: Food disposals sensitivities


Base case assumed 11.0x Food

Colgate plus ULVR Foods & Refreshment disposal sensitivity analysis

Leverage is not an issue when Foods & Refreshment are disposed, given the extent of the

disposal proceeds. Even at our lowest assumed exit multiple and $100 offer price, net

debt:EBITDA doesn’t exceed 4x. Most scenarios are earnings-dilutive, but we would

expect this to be offset in terms of valuation by much lower leverage.

Exhibit 70: Food and refreshment disposals sensitivities


Base case assumes 13.0x combined Food and Refreshment

Net debt/EBITDA all cash

$85.00 $90.00 $92.50 $95.00 $97.50 $100

8.0x 4.1x 4.4x 4.6x 4.8x 4.9x 5.1x9.0x 3.9x 4.2x 4.4x 4.6x 4.7x 4.9x

10.0x 3.7x 4.0x 4.2x 4.3x 4.5x 4.7x

11.0x 3.4x 3.8x 3.9x 4.1x 4.3x 4.4x

12.0x 3.2x 3.5x 3.7x 3.9x 4.0x 4.2x

13.0x 3.0x 3.3x 3.5x 3.7x 3.8x 4.0x

14.0x 2.8x 3.1x 3.3x 3.4x 3.6x 3.8x

15.0x 2.5x 2.9x 3.0x 3.2x 3.4x 3.5x

EPS accretion all cash $85.00 $90.00 $92.50 $95.00 $97.50 $100

8.0x n/a n/a n/a n/a n/a n/a

9.0x 2.2% n/a n/a n/a n/a n/a

10.0x 3.1% 1.8% 1.1% n/a n/a n/a

11.0x 4.1% 2.7% 2.0% n/a n/a n/a

12.0x 5.0% 3.6% 2.9% 2.2% n/a n/a

13.0x 5.9% 4.5% 3.8% 3.1% 2.5% 1.8%

14.0x 6.8% 5.4% 4.7% 4.0% 3.4% 2.7%

15.0x 7.7% 6.3% 5.6% 4.9% 4.3% 3.6%Fo

od

s e

xit

mu

ltip

le

Offer price

Offer price

Fo

od

s e

xit

mu

ltip

le

Net debt/EBITDA all cash

85.00 90.00 92.50 95.00 97.50 100

10.0x 2.5x 2.9x 3.1x 3.3x 3.5x 3.7x

11.0x 2.1x 2.5x 2.7x 2.9x 3.1x 3.3x

12.0x 1.7x 2.1x 2.3x 2.5x 2.7x 2.9x

13.0x 1.2x 1.6x 1.8x 2.0x 2.2x 2.4x

14.0x 0.8x 1.2x 1.4x 1.6x 1.8x 2.0x

15.0x 0.4x 0.8x 1.0x 1.2x 1.4x 1.5x

16.0x -0.1x 0.3x 0.5x 0.7x 0.9x 1.1x

EPS accretion all cash

85.00 90.00 92.50 95.00 97.50 100

10.0x -3.1% -4.5% -5.1% -5.8% -6.5% -7.2%

11.0x -1.6% -3.0% -3.7% -4.3% -5.0% -5.7%

12.0x -0.1% -1.5% -2.2% -2.8% -3.5% -4.2%

13.0x 1.4% 0.0% -0.7% -1.3% -2.0% -2.7%

14.0x 2.9% 1.5% 0.8% 0.2% -0.5% -1.2%

15.0x 4.4% 3.0% 2.3% 1.6% 1.0% 0.3%

16.0x 5.9% 4.5% 3.8% 3.1% 2.5% 1.8%

Fo

od

s &

refr

esh

me

nt

ex

it

mu

ltip

le

Offer price (USD)

Offer price (USD)

Fo

od

s &

refr

esh

me

nt

ex

it

mu

ltip

le

Disposing of ULVR Foods &

Refreshment would facilitate the

disposal of Colgate for broadly

unchanged leverage

UNA NA


15 March 2017



Changes to forecasts

Exhibit 71: Forecast changes for UNA.NA/ULVR.LN


Divisional sales & margin drivers

Exhibit 72: Divisional sales drivers


FY17E New FY 17E Old % Chg FY18E New FY18E Old % Chg

Sales 56351 55224 2.0% 58797 57477 2.3%

Organic growth 3.8% 3.8% (0bps) 4.1% 4.1% (0bps)

EBIT 8997 8671 3.8% 9855 9380 5.1%

U'lying margin 16.0% 15.7% 26bps 16.8% 16.3% 44bps

EPS (€c, UNA) €211c €202c 4.2% €234c €222c 5.6%

EPS (£p, ULVR) 180p 172p 4.8% 201p 189p 6.3%

Net debt 10230 10511 (2.7%) 8153 8738 (6.7%)

Drivers of Change

Forecasts ( Euro m)

We reflect latest fx and move our margin expectations to the top end of the 40-80bps pa guidance

range for the FY17 - FY19 period.

FY-15 FY-16 1Q-17E 2Q-17E 3Q-17E 4Q-17E H1-17E H2-17E FY-17E FY-18E FY-19E

Total Group

Revenue €m 53,272 52,713 13,193 14,760 14,307 14,091 27,952 28,398 56,351 58,797 61,331

Volume/mix 2.1% 0.9% (1.9%) 0.7% 1.8% 3.5% (0.5%) 2.6% 1.0% 2.0% 2.2%

Price 2.0% 2.8% 3.4% 3.0% 2.4% 2.4% 3.2% 2.4% 2.8% 2.1% 2.1%

Organic growth 4.1% 3.7% 1.5% 3.7% 4.2% 5.9% 2.6% 5.0% 3.8% 4.1% 4.3%

M&A (0.1%) 0.5% 0.2% 0.2% 0.1% 0.2% 0.2% 0.2% 0.2% 0.0% 0.0%

Forex 6.0% (5.3%) 3.4% 3.6% 2.6% 1.9% 3.5% 2.3% 2.9% 0.2% 0.0%

Total 10.0% (1.0%) 5.1% 7.5% 6.9% 8.0% 6.4% 7.4% 6.9% 4.3% 4.3%

Per Region FY-15 FY-16 1Q-17A 2Q-17A 3Q-17A 4Q-17E H1-17A H2-17E FY-17E FY-18E FY-19E

Asia AMET RUB

Revenue €m 22,425 22,445 5,875 6,356 6,127 6,021 12,231 12,148 24,379 25,657 26,940

Volume/mix 3.0% 2.1% (0.9%) 1.2% 3.9% 4.3% 0.2% 4.1% 2.1% 3.0% 3.0%

Price 1.5% 2.5% 6.0% 5.0% 3.5% 3.0% 5.5% 3.3% 4.4% 2.0% 2.0%

Organic growth 4.6% 4.6% 5.1% 6.2% 7.4% 7.3% 5.7% 7.3% 6.5% 5.0% 5.0%

Americas

Revenue €m 17,294 17,105 4,350 4,796 4,678 4,883 9,145 9,561 18,707 19,610 20,590

Volume/mix 0.4% (0.2%) (2.3%) 0.5% (0.6%) 2.0% (0.9%) 0.7% (0.0%) 1.5% 2.0%

Price 6.1% 6.3% 2.1% 1.9% 2.0% 2.6% 2.0% 2.3% 2.2% 3.0% 3.0%

Organic growth 6.6% 6.1% (0.3%) 2.4% 1.4% 4.6% 1.1% 3.0% 2.1% 4.5% 5.0%

Europe

Revenue €m 13,553 13,163 2,968 3,608 3,502 3,187 6,576 6,689 13,264 13,530 13,800

Volume/mix 2.6% 0.3% (3.2%) 0.2% 1.5% 4.1% (1.4%) 2.7% 0.6% 1.0% 1.0%

Price (2.2%) (1.1%) 0.5% 1.0% 1.0% 1.0% 0.8% 1.0% 0.9% 1.0% 1.0%

Organic growth 0.3% (0.8%) (2.7%) 1.2% 2.5% 5.1% (0.6%) 3.7% 1.5% 2.0% 2.0%

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Exhibit 73: Divisional profit & margin forecasts


Detailed financial forecasts

Exhibit 74: Profit & loss forecasts (€m unless otherwise stated)

2015 2016 2017F 2017F -

cons. fx

2018F 2019F 2020F

Asia AMET RUB 22425 22445 24379 23903 25657 26940 28287

Americas 17294 17105 18707 17567 19610 20590 21620

Europe 13553 13163 13264 13361 13530 13800 14076

Sales 53272 52713 56351 54831 58797 61331 63983

Asia AMET RUB 3035 3294 3756 3687 4158 4581 5036

Americas 2517 2726 3107 2932 3412 3745 4104

Europe 2313 2026 2134 2151 2285 2442 2604

Core op. profit 7865 8046 8997 8770 9855 10768 11744

JV's & Assocs 198 231 159 159 164 169 174

Net financing (493) (563) (471) (471) (402) (333) (252)

Adjusted PBT 7570 7714 8684 8458 9617 10605 11666

Adjusted tax (2010) (1981) (2302) (2241) (2552) (2818) (3103)

Non-controlling (350) (363) (373) (373) (383) (393) (403)

Net income 5210 5370 6010 5844 6682 7394 8160

Core EPS (FD) €1.82 €1.88 €2.11 €2.05 €2.34 €2.59 €2.86

DPS €1.20 €1.24 €1.33 €1.33 €1.43 €1.56 €1.69


€m FY-15 FY-16 H1-17E H2-17E FY-17E FY-18E FY-19E

Revenues

Asia AMET RUB 22,425 22,445 12,231 12,148 24,379 25,657 26,940

Americas 17,294 17,105 9,145 9,561 18,707 19,610 20,590

Europe 13,553 13,163 6,576 6,689 13,264 13,530 13,800

Total 53,272 52,713 27,952 28,398 56,351 58,797 61,331

Core operating profit

Asia AMET RUB 3,035 3,294 1,775 1,981 3,756 4,158 4,581

Americas 2,517 2,726 1,307 1,799 3,107 3,412 3,745

Europe 2,313 2,026 1,185 949 2,134 2,285 2,442

Total 7,865 8,046 4,267 4,729 8,997 9,855 10,768

Core Margin (%)

Asia AMET RUB 13.5% 14.7% 14.5% 16.3% 15.4% 16.2% 17.0%

Americas 14.6% 15.9% 14.3% 18.8% 16.6% 17.4% 18.2%

Europe 17.1% 15.4% 18.0% 14.2% 16.1% 16.9% 17.7%

Total 14.8% 15.3% 15.3% 16.7% 16.0% 16.8% 17.6%

Core profit profile

Asia AMET RUB 39% 41% 42% 42% 42% 42% 43%

Americas 32% 34% 31% 38% 35% 35% 35%

Europe 29% 25% 28% 20% 24% 23% 23%

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Exhibit 75: Cashflow & net debt forecasts (€m unless otherwise stated)

2015 2016 2017F 2017F -

cons. fx

2018F 2019F 2020F

Core op. profit 7865 8046 8997 8770 9855 10768 11744

D&A 1370 1464 1387 1387 1402 1432 1466

EBITDA 9235 9510 10384 10157 11257 12200 13210

Share based payments 150 198 170 170 180 190 200

Investment in NWC 720 51 118 118 124 133 142

Cash restructuring (133) 0 (100) (100) (100) (100) (100)

Cash taxation (2021) (2251) (2393) (2329) (2551) (2816) (3102)

Other (621) (461) (350) (350) (350) (350) (350)

Operating cashflow 7330 7047 7828 7665 8560 9257 10000

Net capex (2074) (1878) (1809) (1809) (1870) (1933) (2000)

Net M&A (1584) (1701) 546 546 0 0 0

Other 0 286 331 331 130 135 140

C'flow pre-financing 3672 3754 6897 6734 6820 7458 8141

Cash interest (460) (367) (391) (391) (322) (253) (172)

Dividends (3404) (3609) (3786) (3786) (4076) (4437) (4815)

Other financial (1413) (887) (336) (336) (345) (354) (363)

Change in net debt (1605) (1109) 2384 2221 2077 2416 2791

Opening net (debt/cash) (12722) (11505) (12614) (12614) (10230) (8153) (5738)

Closing net debt (14327) (12614) (10230) (10393) (8153) (5738) (2946)


Exhibit 76: Key ratios (priced at €45.65 for the NV on 14 March 2017)

2015 2016F 2017F 2018F 2019F 2020F

Growth & margin

Organic sales growth 4.1% 3.7% 3.8% 4.1% 4.3% 4.3%

Core operating margin 14.8% 15.3% 16.0% 16.8% 17.6% 18.4%

Core margin progress (bps) 27 50 70 80 80 80

Financial

Average net debt:EBITDA 1.5x 1.3x 1.1x 0.8x 0.6x 0.3x

Year-end net debt:EBITDA 1.6x 1.3x 1.0x 0.7x 0.5x 0.2x

EBITDA interest cover 20.1x 25.9x 26.5x 34.9x 48.3x 76.9x

Adjusted tax rate 27.3% 26.5% 27.0% 27.0% 27.0% 27.0%

DPS growth 6.5% 3.1% 7.9% 7.6% 8.8% 8.5%

Dividend payout ratio 66% 66% 63% 61% 60% 59%

Cash dividend cover 0.8x 0.8x 1.6x 1.5x 1.5x 1.6x

Profit & return

Core margin, post tax 10.7% 11.2% 11.7% 13.4% 12.8% 0.0%

Asset turn 1.8x 1.6x 1.7x 1.7x 1.8x 1.8x

ROIC (post-tax) 19.1% 18.0% 20.1% 21.8% 23.5% 25.3%

Trading NWC days (6) (7) (6) (7) (7) (8)

Operating cash conversion (operating cashflow pre-tax & financing/core profit)

Pre-capex 119% 116% 114% 113% 112% 112%

Post-capex 93% 92% 94% 94% 94% 95%

Capex:depreciation 1.9x 1.3x 1.5x 1.6x 1.6x 1.6x

Valuation

PER 25.2x 24.4x 21.8x 19.6x 17.7x 16.1x

Dividend yield 2.6% 2.7% 2.9% 3.1% 3.4% 3.7%

FCF yield (ex. M&A) 3.7% 3.9% 4.6% 5.0% 5.5% 6.1%


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Company DescriptionUnilever is one of the leading European Food & Beverage and Home & Personal Care companies, with 2012 revenues of €51.3bn. The Food& Beverage part of the business accounted for 47% of 2012 sales and includes global brands such as Knorr, Hellmann's, Lipton, Becel andMagnum. The Personal Care division, with brands such as Dove, Lux, Axe and Sunsilk contributed 35% to group revenues in 2011, while theHome Care division accounted for the remaining 18% with brands like Omo, Cif and Domestos.

Unilever is one of the leading European Food & Beverage and Home & Personal Care companies, with 2011 revenues of €46.5bn. The Food& Beverage part of the business accounted for 49% of 2011 sales and includes global brands such as Knorr, Hellmann's, Lipton, Becel andMagnum. The Personal Care division, with brands such as Dove, Lux, Axe and Sunsilk contributed 33% to group revenues in 2011, while theHome Care division accounted for the remaining 18% with brands like Omo, Cif and Domestos.

Analyst Certification:I, Martin Deboo, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, James Letten, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Martin Deboo is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: James Letten is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Investment Recommendation Record(Article 3(1)e and Article 7 of MAR)

Recommendation Published , 17:16 ET. March 14, 2017Recommendation Distributed , 05:00 ET. March 15, 2017

Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,

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P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Anheuser-Busch InBev (ABI BB: €101.00, BUY)• Nestle (NESN VX: CHF76.05, HOLD)• Reckitt Benckiser (RB/ LN: p7,333.00, BUY)• The Procter & Gamble Company (PG: $91.00, BUY)• Unilever PLC (ULVR LN: p4,042.00, BUY)

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Notes: Each box in the Rating and Price Target History chart above represents actions over the past three years in which an analyst initiated on acompany, made a change to a rating or price target of a company or discontinued coverage of a company.Legend:

I: Initiating Coverage

D: Dropped Coverage

B: Buy

H: Hold

UP: Underperform

For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1100 50.25% 338 30.73%HOLD 912 41.66% 181 19.85%UNDERPERFORM 177 8.09% 15 8.47%

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Documents

Unilever NV Positive Spread From Here. BUY - Jefferies · PDF fileA Wake-Up Call That Is Fundamentally Good News for Investors ‘This has certainly been a trigger moment for Unilever