After The Kraft Heinz Deal Will Unilever plc Be Buffett’s Next Target?

The merger between two of the world’s 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, there’s plenty of speculation about which company Warren Buffett’s Berkshire Hathaway conglomerate will pounce on next. 

Unfortunately, in its current form, Unilever (LSE: ULVR) is unlikely to attract Buffett’s 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 2014 with an operating margin of 18.4%. Meanwhile, the company’s 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 Unilever’s business that would be likely to attract his attention is the company’s food division.

You see, by combining Unilever’s 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 Buffett’s 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, Unilever’s food arm could be worth as much as €31bn, or just under £22.6bn. 

But it’s unlikely that Unilever will want to sell its food division any time soon. If any buyer wants to get their hands on it, they’ll 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 — it’s a great company. Unilever has been around for more than a century and the company is only getting better with age.

Indeed, despite Unilever’s size, City analysts expect the company’s earnings to continue to grow at a high single-digit rate for the next two years. What’s more, Unilever’s 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 Unilever’s impressive growth rate and the company’s 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.