Unilever PLC, the maker of Dove soap, Axe deodorant and Cif cleaning products, announced a strategic shift that will see the company move away from food and concentrate on beauty, personal care and home‑care items. The move follows a March agreement to merge its food business with U.S. spice maker McCormick, creating a new entity in which Unilever will retain roughly a 55% share.
Why the change?
Analysts say investors have been rewarding more focused consumer‑goods firms. Unilever currently trades at about 11.5 times enterprise value to core earnings, compared with 14.8 for Procter & Gamble, 17.5 for L’Oréal and 22.7 for Coca‑Cola. The lower multiple reflects a perceived “conglomerate discount” that many investors apply to diversified companies.
By exiting the food segment, Unilever hopes to eliminate that discount and achieve a valuation closer to its peers. The food business, while historically profitable, has grown more slowly than the company’s beauty and personal‑care lines. The new focus is intended to allow faster growth, higher margins and more targeted innovation.
Investor reaction
Portfolio manager Dan Hanbury of Ninety One, a major holder of Unilever, Colgate‑Palmolive and L’Oréal, said the market will need clear evidence that the restructuring is delivering results. “Until you show me the evidence that you’re turning this around, you’re sitting on a very low multiple,” he said, adding that the company will likely need three or four quarters of strong volume growth to convince skeptics.
Other investors echo the sentiment. Will James, portfolio manager at Guinness Global Investors, noted that execution will be the next hurdle. “If Unilever continues to execute, it will see a degree of re‑rating and then hopefully grow from there,” he said.
Historical context
Large industrial firms such as General Electric and Siemens have spent years simplifying their structures to avoid the conglomerate discount. Consumer‑goods companies are following suit. Procter & Gamble, for example, exited food and trimmed its brand portfolio in the early 2000s, subsequently delivering stronger growth and a valuation premium for about a decade.
Unilever’s CEO Fernando Fernandez has accelerated the retreat from food. Earlier this year the company spun off its ice‑cream business and then struck the $65 billion deal with McCormick. The transaction will leave Unilever with an almost 10% stake in the combined food entity, while its shareholders will own roughly 55% of the new company.
Recent performance
Unilever reported improving results in recent quarters, and in July said sales volumes had reached their highest level in more than a decade. Nonetheless, some investors remain wary of the lingering exposure to the slower‑growing food category through the McCormick stake.
Barclays analyst Warren Ackerman said the market will watch closely how the partnership with McCormick impacts Unilever’s overall growth trajectory.
Looking ahead
Fernandez told an industry event in June that each quarter’s performance brings the company closer to demonstrating the value of the McCormick transaction. “I believe that every quarter that goes by, and we deliver the numbers that we have been delivering, and we get closer to the closing of a transaction of McCormick, the value of Unilever will be shown,” he said.
Unilever declined to comment further on the strategy.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
