Jeremy Warner's Outlook: Unilever takes on water as FitzGerald bows out

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The Independent Online

Rain again, this time at Unilever. When a company blames the weather for a poor trading performance, it is generally symptomatic of wider underlying problems, and so it has proved at Unilever.

Rain again, this time at Unilever. When a company blames the weather for a poor trading performance, it is generally symptomatic of wider underlying problems, and so it has proved at Unilever. Poor summer weather in Northern Europe provides some excuse for substantially lower sales of ice cream and Ready to Drink Liptons Tea, but in a company as large and diverse as Unilever it cannot be the whole story.

Both in Asia and Europe, competition remains intense, particularly in home and personal care markets. In attempting to keep earnings growing in line with "low double digit" targets, Unilever seems to have skimped on brand investment. The result is that already sluggish sales growth - Unilever left ambitious sales growth targets abandoned at the wayside some while back - has slowed to virtually none at all.

The problem has been building for ages, and although not yet at crisis proportions, it's apparent that Unilever has failed to stay competitive, both on price and promotional spend. Top line growth has been sacrificed for the bottom line, and as always occurs when a company underinvests for too long, performance has all of sudden begun to stall.

Belatedly, Unilever is being forced to change tack. Out goes the low double digit earnings growth guidance for this year as in a mad dash the company orders a substantial increase in price and marketing promotion. Investors will just have to hope that it's not already too late, for once a brand is in decline, it becomes incredibly expensive and difficult to reverse.

For Niall FitzGerald, now in his last two weeks as joint chairman of Unilever after six years before the mast, the timing could hardly be more unfortunate. When he took the wheel, Mr FitzGerald talked enthusiastically about changing Unilever from the unwieldy supertanker of a company it was then into a flotilla of fast moving frigates that would be better adapted to the choppy waters of today's highly competitive global economy. If he's succeeded only to lead his fleet unwittingly onto the rocks, that would indeed be a terrible epitaph.

Unilever is one of those socially responsible companies beloved of woolly corporate theorists and third way politicians. For those who work there, the pay, conditions and perks are excellent, and although Mr FitzGerald has been as active while at the helm as the next CEO in taking the axe to his crew, he's done it in a humane, touchy feely sort of way that makes the business of being made redundant almost pleasant.

Unilever is a keen sponsor of the arts, it invests heavily in the local community and it encourages its senior people to take time off to pursue socially worthy causes. There are sound management and operational reasons for wanting to be seen as the acceptable face of capitalism, but I sometimes wonder whether Procter & Gamble, Nestlé and Unilever's other major competitors are quite so sensitive to the world around them. It's a curiosity for a company of such longevity, but in attempting to satisfy the City alongside other stakeholders, Unilever seems to have taken its eye of the ball and underinvested in its brands.

It would be a shame if Mr FitzGerald's reign came to be judged solely on the basis of yesterday's profits warning, for he's done great things for the company. But for his influence, Unilever would be in much worse shape today than it is. Yet he's probably right to be moving on. His successor, Patrick Cescau, needs to order an urgent change of course.

M&S's let-down

Marks & Spencer risks a rebellion from its own shareholders this morning by pitching the terms of a £2.3bn stock buy-back at well below the price of Philip Green's failed £4 a share offer. Having told shareholders the company was worth well in excess of that price - and, indeed, actively prevented any such offer being put to investors - directors are today expected to propose a range for the buy-back which straddles the present stock market price up to a maximum of only 370p a share. How stupid can you look? What directors seem to be saying is that they are not prepared to allow investors to consider £4 a share but they are prepared to offer them 370p.

The company and its advisers argue a reasonably convincing case in pitching the buy-back so low, but it is not an easy one to get across in public relations terms, and I'm not sure I go along with it anyway. Here's the thinking.

There are broadly three ways of doing a big capital distribution. One is via a special dividend, which has the advantage of all shareholders being treated exactly the same: everyone gets their share of the capital being doled out. Yet at least 10 per cent of it will go straight to the Inland Revenue, which is why so few special dividends are paid nowadays.

A second method is through a "capital reduction scheme of arrangement", which enables the distribution to be taxed as capital rather than income, thereby allowing small shareholders to take advantage of their capital gains tax allowances. M&S has already tried this route once, with some success. However, it has never been popular with US investors, among whom there is no such tax advantage. Since it was last tried, the proportion of M&S owned by Americans has grown considerably. So that's out too.

The third approach is via a share buy-back, which though it sometimes seems to have no positive impact on the share price, should underpin the value of the shares and produce a corresponding increase in earnings per share. Companies usually buy their stock back by dipping in and out of the market when the price seems to be at its most advantageous.

M&S plans to do it all in one go via a tender offer, giving all shareholders the right to sell at least a part of their holdings should they wish. The company and its advisers believe directors are under a fiduciary duty to pitch the offer at the lowest possible price they can get away with, as to do anything else would disadvantage shareholders who wish to remain in for the long haul. Yet it will be mighty embarrassing for them if they pitch it so low that nobody subscribes.

The gamble they are taking is that there is a wall of "hot money" attracted in by the bid activity that needs to get out at almost any price. The tender offer ought to remove this overhang of short-term holders to the benefit of all who are in for the long term. Yet I'm not at all sure that fiduciary duty ought to be making any distinction between short and long-term holders. Where in any case do Stuart Rose and the rest of his board imagine the speculators got their stock from. The tooth fairy? As likely as not it was from the very long-term holders directors are now so keen to protect.

If the proposal was to do the buy-back via market operations, then M&S would have a point in not wanting to bid at £4 a share. Only hedge funds and other market professionals would gain the benefit of the higher price. But this is a tender offer which gives all shareholders the right to subscribe. Today's trading statement is likely to be a miserable affair, and in the absence of a strong stock market rally all round, the shares are unlikely to see £4 again for some while. All the more reason to repay investors by allowing them to redeem at least some of their shares at this price. In attempting to squeeze the speculators, M&S is doing itself no favours. When Philip Green next comes knocking, they'll sell the company down the river.

Capital/GWR

Capital Radio and GWR are such an obviously good fit that it's amazing it is taking them so long to agree merger terms. With nearly 40 per cent of the national market for radio advertising, the deal is virtually certain to be referred to the Competition Commission, but locally there's virtually no infringement of Ofcom's "two plus one" rule for safeguarding plurality in radio, nor is there any undue local monopoly of advertising. If the competition authorities can allow the formation of a single ITV, with more than a half of all TV advertising, then surely they must eventually allow this too. However, I doubt it will open the flood gates to copycat deals. Most other combinations among the radio majors are much more problematic from a competition perspective.

jeremy.warner@independent.co.uk

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