The merger between two of the worlds largest food groups, Kraft and Heinz, funded in part by Warren Buffett, has created a media storm around the world.
And now, after this $46bn deal, theres plenty of speculation about which company Warren Buffetts Berkshire Hathaway conglomerate will pounce on next.
Unfortunately, in its current form,Unilever(LSE: ULVR) is unlikely to attract Buffetts billions, but the company would be attractive if it was broken up.
Worth more in bits
Unilever has four key business divisions. The largest, personal care, reported sales of 17.7bn for 2014with an operating margin of 18.4%. Meanwhile, the companys food division reported revenue of 12.4bn for 2014, with an operating margin of 29.2%. And the last two divisions, home care and refreshment both reported revenue of 9.2bn for 2014, and operating margins of 6.3% and 5.9% respectively.
Buffett likes to maximise his returns and with this in mind, the only part of Unilevers business that would be likely to attract his attention is the companysfood division.
You see, by combining Unilevers global distribution network with that of Kraft and Heinz, Buffett and his partners would be able to reduce costs significantly and increase group-wide operating margins. This would maximise Buffetts return on investment.
How much would it cost?
Buffett and his partners are paying around two-and-a-half times sales for Kraft. On that basis, Unilevers food arm could be worth as much as 31bn, or just under 22.6bn.
But its unlikely that Unilever will want to sell its food division any time soon. If any buyer wants to get their hands on it, theyll have to buy the group as a whole.
This is not a totally unreasonable statement. Buying Unilever whole would cost around 91bn, assuming a price tag of two-and-a-half times sales.
Buying the group whole, cutting costs and then selling off the home care, personal care and refreshment divisions separately, could recoup the purchase cost.
Should investors jump ship?
Unilever is an attractive takeover target for one reason its a great company. Unilever has been around for more than a century and the company is only getting better with age.
Indeed, despite Unilevers size, City analysts expect the companys earnings to continue to grow at a high single-digit rate for the next two years. Whats more, Unilevers shares offer a dividend yield of 3.2% at present levels. Further, the payout is set to grow at an inflation busting 7% this year.
However, due to Unilevers impressive growth rate and the companys defensive nature, investors are willing to pay a premium to get their hands on the stock. The company is currently trading at a forward P/E of 21.5, a price many investors believe is worth paying.
Here at The Motley Fool we’re big fans of Unilever. In fact, we’re so excited about the company and its prospects that we’ve labelledit one of the five shares we believe you can buy and hold forever.
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