If Unilever shareholders thought the era of management-speak twaddle ended a few chief executives ago, say hello to their new partner in the food game. Brendan Foley, the boss of US spice and condiments firm McCormick, ran through the menu as he presented his big grab for Unilever’s Hellmann’s-to-Knorr-to-Marmite food division. The logic, he explained, is all about “maximal adjacency”, “actionable growth levers” and “end-to-end flavour experiences”.
From the point of view of Unilever’s investors, the guff wouldn’t matter if McCormick were paying a fat price in a cash deal. But this $44.8bn transaction is not like that. Unilever will extract $15.7bn in cash but the bulk of the value is represented by the equity element. Unilever’s shareholders will end up owning 55% of an expanded McCormick and Unilever itself will have 10%. It is a very long way from being a clean break. In effect, the FTSE 100 firm is merging its food business with a smaller US firm that will take on oodles of debt to step up several leagues.
Fernando Fernández, Unilever’s chief executive, called it “another decisive step in sharpening our portfolio”, but it is plainly more messy than previous exits. The historic Flora spreads business and the Lipton tea operation were sold straightforwardly to private equity, and the ice-creams went in a simple spin-off last year. In this latest transaction, Unilever’s investors must decide what to do with their helping of McCormick shares when they eventually get them, noting that recent performance (down about a third in the past 12 months) is less spicy than the firm’s Cholula hot sauce.
To think this complicated deal will end up creating value, you have to believe two things. Only one is easy: that Unilever, unencumbered by a food business that it hasn’t enthused about for years, will prosper. Yes, a mini-break may focus more attention on the household goods division (Comfort, Cif, Domestos and so on) and the one that properly excites Fernández: the beauty, wellbeing and personal care division (Dove, Vaseline, fancy shampoos and so on).
But the food mashup just looks awkward. Unilever is contributing the bigger portion (annual sales of $12bn compared with $8bn), the one with faster recent sales growth (2.7% compared with 2%) and the one with superior profit margins (24% compared with 17%). On the basis of those statistics, you’d think Unilever would conclude that it would be better off just managing what it’s got.
After all, the appeal of Unilever’s food business is meant to be its two well-invested winning brands, Hellmann’s and Knorr, which dominate the whole. How are they helped by a side-serving of less-than-global brands such as McCormick’s French’s yellow mustard or Old Bay seasoning? Yes, Unilever gets some cash out to fund share buy-backs, but not a sum that wowed the market. The permanent arrangement is a more sprawling combined food business under faraway management.
Fernández claimed it’s a case of “unlocking trapped value through a growth-led separation” but that was before he had seen the reaction in Unilever’s share price – down 7%. There’s no way to season that number: it’s maximally adjacent to a thumbs-down.
