Unilever’s plan to move its headquarters to Rotterdam enjoys “huge support” among shareholders, chairman Marijn Dekkers declared this week, trying to sound confident that he will win next month’s big vote, necessary for the relocation to go ahead. Three days later, he has another high-profile rebel on his hands. Legal & General Investment Management yesterday became the latest big-name UK fund manager to say it will vote against the move.
“We do not believe Unilever has made a compelling case,” L&G said.
Defeat on 26 October would be a humiliation for the star-studded board of international directors that runs the £120bn company, which has 160,000 employees worldwide. Unilever itself is widely admired for its long-term management of famous brands such as Ben & Jerry’s, Domestos, Dove, Knorr, Lipton and Magnum.
But the proposal to scrap an Anglo-Dutch structure that has existed since 1930, when Lever Brothers of the UK combined with the Margarine Unie of the Netherlands, has caused a storm.
Whatever Dekkers says, the rebellion is significant – and growing. L&G manages a 2% stake in Unilever and is the sixth-largest holder of the plc class of Unilever’s shares. Fellow declared opponents include Aviva Investors and M&G. Lindsell Train will be voting at least some of its shares the same way and Colombia Threadneedle has made sceptical noises.
Unilever is plainly rattled. It bought full-page newspaper adverts this week to make its case, attempting to appeal to private shareholders who will also have a big say in the outcome thanks to a quirky voting model.
How did it come to this? The tale starts in January last year, when US cheese-and-ketchup firm Kraft Heinz launched a daring takeover pitch. Unilever was stunned. The board had assumed their company was so big it was bulletproof, especially from aggressive cost-cutters like Kraft, an outfit branded “fast and ruthless” by Unilever chief executive Paul Polman.
In the event, Kraft rapidly retreated but Unilever took a collective vow of “never again”. The result was a corporate review that was mostly cheered. Unilever pushed its own cost-cutting programme, put its margarines and spreads business up for sale and launched a €5bn (£4.5bn) share buyback. The share price boomed. But the final piece was the proposal to incorporate in the Netherlands. Dual nationality is too fussy for the modern world, the company argued. It makes capital-raisings harder and complicates dealmaking.
Not every investor is convinced by the legal argument, but many are. The critical problem, however, is that Unilever’s shares would be ejected from all UK stock indices, including the FTSE 100 and FTSE All-Share, if the company incorporates in Rotterdam.
Index-compiler FTSE Russell, part of the London Stock Exchange Group, appears adamant that Unilever’s ancient ties to the UK would not count. The country of incorporation is the decider. Unilever’s shares would still be traded in London, as well as Amsterdam and New York, but index status would be lost.
For the likes of L&G, that is a deal-breaker. Most of the money it runs is “passively” managed, meaning its funds buy every stock in the relevant index. Its managers believe clients like owning Unilever. “We asked the company to ensure that any approach they take safeguards the ability of our clients to maintain their investment and benefit form Unilever’s continued success,” said Sacha Sedan, L&G’s director of corporate governance. Exit from the FTSE indices clearly fails that test. A UK tracker fund would become a forced seller.
So why doesn’t Unilever just unify in the UK? Why was Rotterdam chosen in the first place? Unilever’s main argument strikes many as thin. As currently structured, two companies sit beneath Unilever’s main holding company – the Dutch NV unit that comprises 55% of the whole and the UK plc that is 45%. The bias makes Dutch incorporation natural, argues the company, and, besides, the NV stock is more actively traded.
Rebels donot buy it. The 55/45 split is irrelevant, they say. London is Europe’s biggest capital market and will remain so after Brexit. And the index point is critical, they argue. “I don’t see logically why any UK shareholder would support Unilever’s decision to go Dutch because there is no upside but there is downside, and we lose an excellent company from the index,” David Cumming of Aviva Investors has said.
Some sceptics suspect deeper motives behind the choice of Rotterdam. Did Unilever judge that the Netherlands, with its stricter takeover rules, would offer greater sanctuary from future Krafts? Was Brexit a factor? Did a board with Dutch chairman and a Dutch chief executive simply prefer the Netherlands?
It’s purely business, says Unilever, pointing out that it would simultaneously dismantle a Dutch trust that could, in theory, have been used to frustrate bidders. Worried Brits, it argues, should remember that two out three operating divisions will still be in the UK and the jobs are not moving.
It is still possible that Unilever will get the 75% majority it needs in one of two polls. For starters, international investors are unlikely to make a fuss. But the other poll is unpredictable. Unilever requires “a majority in number” among plc investors, meaning everybody gets one vote, whether they own 100 shares or 100,000. That gives private shareholders real clout since there are 36,000 of them versus only 8,500 institutions. Their numbers could even be swelled if individuals unlock themselves from nominee arrangements at the likes of Hargreaves Lansdown and ensure their votes are counted in both polls. In fact, anyone can still buy a share and vote.
From Unilever’s point, the picture must look suddenly chaotic. Its lobbying at the end of last year was concentrated on ensuring the UK government, in the midst of its Brexit woes, did not make a fuss about the rejection of London. Now it could be facing a patriotic small army of UK private investors who may take their lead from Aviva, L&G and M&G. And fellow sceptic Nick Train of Lindsell Train is a hero in the world of retail investors.
The showdown is still more than three weeks away, which leaves time for more plot twists. But note that L&G said it had taken the unusual step of declaring early “due to significant client enquiries”.
Put another way, the temperature around Unilever’s “go Dutch” plan is running far higher than the company ever expected.
