Unilever Nigeria Plc: Divestitures as a Value-Creating Approach

First, Unilever’s divestiture plan is still unclear. Would it be an outright sale? Would it be an asset transfer arrangement (similar to the GSK and Fidson arrangement)? In any case, I think this might be positive for Unilever. Prior to the divestiture news, we had always expressed concerns at WSTC about the Company’s below-par performance. Cost management is not bad at all but there has been a persistent weakening of operating margin. Although the problems are not specific to Unilever. Another company in a similar business line, PZ Cussons, is also faced with significant margin pressures. But for PZ’s Haier Thermocool products, numbers could have been much worse for them. Nonetheless, I think Unilever might just have lost its competitive advantage in that space.

Deciding what businesses to be in is clearly one of the most important decisions executives make, and having a clear competitive advantage is important. There is a common saying in finance about betting on the horse or the jockey. The idea is that it is better to have a competitive advantage (horse) than to have a good management team (jockey). With a competitive advantage, a weak management team can always be replaced (basically the business of private equity folks), but even the best management team cannot salvage a weak business.

At different stages of an industry’s or company’s life span, certain businesses that made sense previously may no longer work anymore. As demand falls in a mature industry (for whatever reasons), long-standing coys tend to have excess capacity. If they can not shrink assets and people along with the capacity, then they are not the best owners of the business anymore.

During moments like this, one group of managers may be better equipped to manage the business than another. Therefore, acquisitions and divestitures are often the best way to sensibly allocate capital. This means that coys need to regularly evaluate whether they should continue to own certain businesses in their portfolios. There may be businesses that should be divested because they no longer fit in anymore even if they were once the foundation of a coy’s success. Coys also need to look out for new businesses to own or develop through acquisitions or organically.

At this point, Unilever may just not be the best owner of those businesses and from a return on invested capital (ROIC) perspective, it might be sub-optimal to keep them. Sometimes, divesting businesses ensures that the remaining units reach their full potential and the overall coy grows stronger.

The desire to hold on to businesses is strong. It may be due to bias (status quo), ego (‘the fear of becoming smaller’), or even external pressures. When Jack Welch sold GE’s housewares unit, he got angry letters accusing him of destroying the coy’s heritage. But whatever the pain of divesting, holding on to a unit too long also imposes substantial costs, often far outweighing the benefits of keeping the unit (UACN learned in a hard way).

Coys often divest too late. Most divestitures happen when the problems become very obvious instead of being proactive?based on what the trends and data are saying (hmm, to be fair, it’s not that easy or simple). Executives are sometimes often concerned that divestitures look like an admission of failure, make their coy smaller, and reduce the coy market value.?Interestingly, there are numerous evidences that point to a reverse that indeed coys get better in market value post-divestiture.

Right now, Unilever sits on N68bn cash (that had been built up since 2017 when they raised equity via rights issue). They could not invest the cash because there were no compelling growth opportunities. Fixed assets declined to N21bn in 2022 from N27bn in 2020. This suggests a depreciation of assets without adequate capex to replace them. What is the incentive to invest, anyway? Where is the demand? Personally, I believe Unilever lost its competitive advantage in those businesses and that’s fine. I mean, in spite of the significant spending on marketing and sales promotions over the past years, volume growth did not justify those investments.

I think I welcome this development. It’s indeed a difficult time to do business and maintain a competitive edge in the current operating environment. I wish the management all the best and as we await further information, I am hoping they execute their future strategies well.?