Unilever review likely to lead to food disposals

Unilever chief executive Paul Polman abandons its sustainability credentials at his peril, suggests one City analyst

Unilever’s top-to-bottom review of its business following the rejection of the £115bn bid from US Kraft Heinz earlier this week is likely to lead to the Anglo-Dutch company disposing of some of its underperforming food business, according to City analysts.

While some have suggested it could divest itself of all its food activities, others think it will be confined to the most underperforming ones that least contribute to the fast-moving consumer goods (FMCG) group’s top-line financial results. Any sales could be used to boost shareholder returns, ventured one analyst.

Commenting on Unilever’s announcement, Julian Wild, a partner with corporate finance specialist Rollits, said: “Following any takeover approach such as this, Unilever will inevitably undertake a root-and-branch review of its operations to identify non-core businesses, surplus assets, opportunities for cost savings, etc.

“In other words, they will do all the things Kraft Heinz would have done if the acquisition had gone ahead. Whether Unilever will do it in such an aggressive way as Kraft Heinz would inevitably have done, only time will tell. Unilever’s style is very different.

‘Trade and private equity interest’

“It is difficult to say precisely which parts of the Unilever business might be ‘on the block’ but I would question whether most, if not all, of Unilever’s food division (which doesn’t include the refreshments business with beverages and ice cream) are core to Unilever’s long-term plans. If they were to be sold, there would be plenty of trade and private equity interest.

“It is possible that this was Kraft Heinz’s real strategy to extract the food business from Unilever.”

However, Darren Shirley, an analyst with broker Shore Capital, was more circumspect and doubted Unilever would want to dispose of those food and drink businesses that made such a valuable contribution to its financial performance.

“I do question some of the suggestions that [Unilever] would want to sell off the whole of the food business, because there is some decent performing areas in there,” said Shirley.

Last Wednesday (February 22) Unilever announced that it was conducting a comprehensive review of options available “to accelerate delivery of value for the benefit of our shareholders”.

“The events of the last week have highlighted the need to capture more quickly the value we see in Unilever,” it said in a statement. “We expect the review to be completed by early April, after which we will communicate further.”

Unilever is one of the world’s leading suppliers of food, home care, personal care and refreshment products with sales in over 190 countries. It has 169,000 employees and generated sales of €52.7bn (£45bn) in 2016. Over half (57%) of the company's footprint is in developing and emerging markets. It has more than 400 brands, including Persil, Dove, Knorr, Domestos, Hellmann’s, Lipton, Wall’s, PG Tips, Ben & Jerry’s, Magnum and Lynx.

‘That pressure is only going to build’

“The spreads business has been under review for a couple of years,” Shirley added. “You’ve got to say there has been some pressure in some quarters for [Unilever] to be a bit more proactive with what they do with that and I would suggest that pressure is only going to build. When you look at a review of Unilever that would be the first one to have a look at.”

However, Shirley suggested that even Unilever’s spreads business was probably performing better at the moment than some of its competitors, such as Dairy Crest, and any sale of this business could hit the company’s margins in the short term.

Shirley argued that other parts of Unilever’s food activities, such savoury products – and its Knorr brand in particular – had been gaining ground in emerging markets, thanks in part to the company’s new product development (NPD) activities.

“You are looking at a [savoury] business that has been performing reasonably consistently and the company has been growing at single mid-digit figures,” said Shirley. “So that would be inline or slightly above what the broader company has reported over that period and I would suggest that within the FMCG world that is a more than acceptable growth rate. I would suggest that isn’t one of the key things they would want to get rid of.

 “I would expect them to be looking at dressings, because if you look at the growth potential for Hellmann’s and that sort of category relative to the rest of the business, it’s probably in the low single digit region.”

While the black tea business, including Lipton, could be vulnerable within Unilever’s refreshments category, Shirley suggested the ice cream businesses were “market leading” and “a core strength” and were unlikely to be disposed of.

Unilever is scheduled to provide a first-quarter trading update on April 20, and Shirley thought it might use this occasion to update the market on its plans following the strategic review. “I would say there is a reasonably strong likelihood of that,” he said.

Share buy-backs

“But it is not just disposals,” added Shirley. “Obviously the group’s got a good, strong balance sheet, which would allow them to leverage up and engage in share buybacks, which is something they have been reluctant to do over the past couple of years.”

Shirley also argued that Unilever’s focus on business and environmental sustainability under the leadership of its chief executive Paul Polman was unlikely to change significantly for any short-term business margin appreciation, since this would be at the cost of the group’s investment in NPD, brand equity and marketing support.

One of his concerns, following a briefing to analysts given late last year, was about Unilever possibly moving away from a focus on driving volume growth in the business to one based more on meeting margin targets.

“I took comfort from the fact that they were running the business to drive volumes and positive margin progress would be an outcome of that,” said Shirley.

“So I think they have got to be careful. Shareholders have bought into the Unilever story because of that sustainability – not so much from an ethical perspective but from a business perspective – rather than just give us a [margin] burst for 18 months.”

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