Well, that’s spiced things up. In a week when it was reported Unilever was looking to, in the corporate parlance, “separate” its food assets and then it was said elsewhere that the Hellmann’s maker had recently held talks with Kraft Heinz over a possible deal, this morning UK time came confirmation the FMCG giant is in discussions about a transaction that could mark its exit from the sector.
Hours after The Wall Street Journal reported Unilever was in talks with McCormick & Co., the US spices and sauces group, over a possible deal, both companies put out brief statements to say, yes, they are looking into a transaction.
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“Unilever confirms that it has received an inbound offer for its foods business and is in discussions with McCormick & Company, Inc.,” the Knorr brand owner said.
In its own statement, McCormick said it is “engaged in discussions with Unilever regarding a potential strategic transaction” for the food assets.
A deal would combine brands such as McCormick’s namesake line of herbs and seasonings, French’s mustard and Frank’s RedHot sauce with Unilever’s Hellmann’s mayonnaise, Knorr cooking aids and Horlicks malt drinks, as well as a tail of more local brands such as Colman’s and Marmite in the UK.
Unilever has been embarking on something of a long goodbye from food for well over the last decade, with brand disposals like Skippy and Slim-Fast to larger divestments in areas like spreads, tea and, most recently, ice cream.
As the deals mounted up, a succession of Unilever CEOs faced questions about the company’s future in the sector and they have continued under current chief executive Fernando Fernandez, who took the helm at the Dove soap maker last year – especially with three-quarters of the group’s revenue now generated outside food after the ice-cream demerger.
Publicly, Fernandez hasn’t committed either way, instead talking up the attributes of Unilever’s remaining food assets, telling JPMorgan analyst Celine Pannuti in December: “I believe we have a food portfolio that is the envy of the industry.”
However, in the same interview, Fernandez said the completion of Unilever’s ongoing moves to offload assets in what he described as “the periphery of foods, particularly in local food brands in Europe” would mean two brands – Hellmann’s and Knorr – would account for at least 70% of the company’s food business. Notably, he added: “This will give us a lot of optionality in the future.”
And, now, one option on the table is a deal with McCormick. As is customary, Unilever and McCormick cautioned there was no certainty an agreement would be reached. Unilever’s share price has risen slightly in UK trading today, up 1.39% to 4,637.5p by 12:52 GMT. Shares in McCormick were down 1.11% at $53.45 at 13:43 New York time.
Given the relative size of Unilever’s food business compared to the McCormick group and in the absence of any confirmed information on how a transaction might take shape, there has been plenty of chatter among analysts about how a deal might be structured.
“Because Unilever Foods is two times the size of McCormick, we believe McCormick would issue shares to Unilever shareholders so that they own at least two-thirds of the combined business. However, we think McCormick management would lead the company,” TD Cowen analyst Robert Moskow, who covers the US group, says.
At Barclays, Warren Ackerman, who covers Unilever, says “the devil is in the detail”. He adds: “The WSJ is suggesting an all-stock deal but, for now, we do not know the ownership ratios and have not yet modelled pro-forma financials.
“We believe Unilever would be seeking some cash to account for the dis-synergies for the potential transaction. The exchange ratio would also be a critical determinant of value creation for both sets of shareholders. Given Unilever’s food business is significantly larger and more profitable than McCormick’s, we would expect Unilever shareholders to receive a majority stake in the combined entity in the event of a merger – potentially in the 55–65% range – though this would depend on the agreed valuation and any premium embedded in the potential deal.”
On the face of it, an exit from food and a focus on home and personal care would boost Unilever’s organic growth rate.
Last year, Unilever’s group underlying sales rose 3.5%. From food, they increased 2.5%. The food division now accounts for just a quarter of Unilever’s €50.5bn ($58.06bn) annual turnover. However, the food arm does generate stronger margins.
As Just Food reported earlier in this week, not all Unilever watchers believe the company should hive off its food assets, at least not yet.
Degroof Petercam analyst Fernand De Boer is one observer who questions whether the possible deal with McCormick – much like with Unilever’s previous divestments in food – would benefit the company’s shareholders.
“Overall, look at all those moves Unilever made: did it really change the company, create a lot of value for the shareholders of Unilever? If you look where the current valuation is, where the current share price is, I doubt it,” De Boer tells Just Food.
He acknowledges the potential attractiveness to Unilever in a deal with McCormick over a deal with Kraft Heinz, pointing to the relative valuations of the two US groups. “McCormick, I think, is trading at almost 12 times EV/EBITDA versus less than nine times for Kraft Heinz, so that’s a big difference in valuation,” De Boer says.
However, he questions whether an exit from food would bolster Unilever’s growth and margin prospects. “I do not believe that the growth rates are going to be that different. The margins are not going to be that different. I think they should simply focus on all the four businesses and go further. The thing is, if you really want to create value, think about your position in India. Why don’t you sell part of your India business, which is trading so much above your own multiples?”
For now, Unilever reviewing its position in India and its near 62% shareholding in locally listed group Hindustan Unilever does not appear to be on the cards. The McCormick is one idea we know is on the table, although Unilever could look to demerge its food assets. “The alternative would be to demerge foods but that would take time and we sense investor appetite is low following the Magnum spin,” Ackerman says.
For the Barclays analyst, “among the obvious trade buyers” for Unilever’s food assets “were always likely to be McCormick and Kraft Heinz” and notes: “What this process shows the market is that Unilever are pretty determined to accelerate its portfolio transformation.”
However, Ackerman adds: “A potential deal could offer scale benefits but securing terms that clearly protect Unilever shareholder value is the central challenge.”
It’s coming up to a decade since McCormick made waves on the London market with its – ultimately failed move – to buy the locally listed group Premier Foods..
A deal with Unilever would, of course, dwarf that transaction and, for TD Cowen’s Moskow, the move has “strong strategic logic”.
“This transaction creates an opportunity for McCormick to completely transform its business in terms of scale, international reach, and importance to retailers. Just about every McCormick CEO we have met in the past 24 years has told us that they hoped Unilever would sell them their Knorr bouillon brand and perhaps other condiments in their portfolio. This transaction goes even farther than that,” Moskow says.
He believes a deal would lead to “an international powerhouse”, adding: “McCormick would gain considerable scale and influence with retailers through combined merchandising for Hellmann’s, Frank’s RedHot, French’s Mustard, and McCormick grilling products. McCormick is the market leader in the spice rack in several countries and has expanded successfully into hot sauce through acquisitions. We see strong strategic logic for the combination and significant opportunities for synergies.”
