Vaarwel Unilever

No surprise

Politically the optics for Downing Street are not great. However, there has been an air of inevitability that Unilever would choose Rotterdam over London for months, so the news is not a major surprise. From the point of view of the business, which is still making a big show of optimising efficiency after it rejected a huge takeover proposal last year, centralisation of top administrative functions makes sense. There was a fair enough of a case to be made for the decision largely an administrative grounds, rather than a hugely economic ones, with a large business imperative for UL to move even regardless of Brexit. That said, it’s difficult to pretend political filters were entirely absent from management’s thought process. For instance, in one sense, the move serves as a 'balancing' function with a view to Netherlands politics and public opinion after the group's recent disposal of the spreads business which was at the heart of its historical Dutch origins. More to the point, management can argue that the decision was not related to Brexit. It could be a fortunate one though, given risks (real or perceived) of temporary trade disruption.

Low impact

Moving HQ will not, however, mechanically lead to a signigicant decline in taxation revenue from the group. Just as important, nor will there necessarily be significant rationalisation of human resource to the detriment of UK employees (though a small number of British job losses look almost inevitable). It’s also notable that the decision leaves UK investment decisions, worth about £1bn a year, intact. Therefore, the sharpest political sting for Theresa May’s government is absent from this news, though of course that will not prevent Brexit opponents of all political colours seizing on it as an example of Britain's incrementally declining business status.

The FTSE will survive

The potential exit of the FTSE 100 stock with the third-largest capitalisation from the benchmark could take investors some getting used to. The short-term impact could be disruptive for both the market and institutional investors with an obligation to hold only benchmark shares. However, the group correctly noted on Thursday that most of its institutional investors are not bound by such obligations, and in any case, historically, the delisting of significant capital from major indices rarely results in lasting impact to individual shares or the index.

Margins more important

A more important influence on Unilever stock for the coming months will be quarterly earnings due in April. Investors will again weigh progress towards sales, profit and efficiency targets the group laid out as part of its rationale for rejecting Kraft Heinz’s $143bn offer last year. So far, Unilever looks on track to lift its operating margin to the goal of 20% by 2020 (after a 1 percentage point rise to 17.5% in Q4). With the HQ distraction out of the way, further margin improvement could help the stock to begin to erase some of its 9% slippage so far this year. Even then, continued gross margin shrinkage on many of the group’s revenue streams will place the Rotterdam vs. London problem in its proper perspective all the more.