After ‘decisive step’ on food, what does Unilever do now?

Unilever signalled the end of an era with the agreement of a $66bn (£50bn) merger of its food division with US spices and sauces specialist McCormick last week.

CEO Fernando Fernandez – lauded by chairman Ian Meakins for his ability to “drive change at speed” when he took the helm last year – hopes Unilever will now be able to compete on a more even playing field with US peers Procter & Gamble and Colgate-Palmolive.

The ex-president of beauty told journalists the transaction marked “another decisive step” in Unilever’s journey to transform into a pureplay home and personal care (HPC) supplier with a stronger financial profile, better gross margins and higher brand investment to support superior volume growth.

“Unilever becomes a sharper, focused home and personal care pureplay with €39bn of revenues, and leading positions in highly attractive categories and fast-growing geographies and channels,” Fernandez said.

When the McCormick reverse takeover completes in mid-2027, it will end almost 100 years of Unilever’s presence in the food industry, which started with an agreement in 1929 to merge Margarine Unie of the Netherlands with British soap maker Lever Brothers.

The move completes a withdrawal from food that began in 2017, when then-boss Paul Polman sold off the spreads business to PE firm KKR.

Polman struck the £6bn deal as a sop to investors after successively fighting off the $143bn hostile takeover approach from Kraft Heinz.

But shareholder pressure to get out of food only intensified for his successors, especially after influential hedge fund activist Nelson Peltz joined the board. Alan Jope oversaw the €4.5bn sale of the tea portfolio to CVC at the end of 2021, while Hein Schumacher kick-started the spin-off of the ice cream division just nine months after his July 2023 appointment.

More on the Unilever-McCormick move:

• Unilever and McCormick investors bail as $44.8bn food deal agreed

• Would McCormick be a good fit for Unilever food brands?

• Unilever bets big on the natural grooming boom

Despite pushing for an exit from low-growth food for years, Unilever investors have expressed unhappiness with the McCormick deal.

Shares in the London-listed group have fallen 8% since the news broke, wiping about £9bn off the market cap in the process. Reaction on the McCormick side was no better, with shares tumbling 9%.

Executives across the companies may have been surprised the consensus skewed towards negativity, but the complex structure of the acquisition was a source of both confusion and concern. Unilever shareholders will own 55% of the new food giant, while Unilever itself plans to slowly sell off its 9% stake after a year. So it may take time before investors get comfortable with their sudden exposure to the significantly smaller McCormick, which does most of its business in North America.

McCormick’s highly leveraged position post-merger, leaving net debt at about four times EBITDA, also raised eyebrows.

“There was always going to be a lot of heavy lifting to make Unilever a pureplay HPC company,” says Barclays’ Warren Ackerman. “There is a risk of restructuring fatigue, but with Fernandez at the helm we think it is unlikely.

“Unilever is morphing into a very different company that will have higher growth and higher margins. For decades, it has flattered to deceive and has not delivered the consistent performance investors have craved.”

Worth the risk

For Ackerman, the short-term risk involved is worth the prize at the end. “No one said fixing Unilever for good would be easy or instant gratification for shareholders,” he argues.

Unilever will now focus on 10 core HPC categories, spanning hair, skin, oral care, cosmetics, deodorants, laundry and washing-up liquid (see box). Annual sales will be broadly spilt between beauty & wellbeing (33%), personal care (33%) and household (30%) – and a small amount from the beverage business in India that wasn’t part of the McCormick deal.

Unilever will have the second-largest beauty and personal care business globally, and the number one homecare company in emerging markets, according to Fernandez.

“It very much reminds us of the portfolio P&G created after a period of significant M&A a decade ago,” Ackerman adds. “P&G made a clear decision to double down on everyday categories where superiority drove repeat purchase and market share gains. This decision was a key element that led to a prolonged period of outperformance, and Unilever will be very much hoping its P&G-esque playbook can yield a similar outcome.”

Over the past three years, the Unilever HPC divisions have returned growth of 5.4% and boosted volumes by 2.5%, well ahead of competitors.

The performance gets even better when drilling down to the 25 HPC ‘powerbrands’ at the heart of Unilever’s growth strategy, which will account for 78% of turnover. They have three-year underlying volume growth of 4.2%, with value up 7.1%.

“This impressive level of growth will no longer be hidden or dragged down by foods once the exit has been completed,” Ackerman says.

Unilever plans to continue outperforming markets in this space. “And we will do it with a one share set of capabilities that apply to the whole HPC system,” Fernandez adds. “Unilever will be built on fully synergistic capabilities across science-led innovation, demand creation and operational execution, enabling us to focus where our competitive advantage is strongest.”

Questions remain over how the loss of scale and reliable cash generation from the food business will affect Unilever post-separation.

Looking to personal care for growth

Speculation is already mounting over the possibility for a transformational acquisition in consumer Health. Durex and Nurofen owner Reckitt Benckiser, plus Sensodyne and Panadol parent Haleon, have been tipped as potential targets.

However, Fernandez was quick to explicitly rule out any major moves, earmarking cash from the McCormick deal to pay down debt and go toward share buybacks.

He insisted the bolt-on acquisition programme – allocating €1.5bn a year for deals, including Dr Squatch and Wild in 2025 – will remain in place.

Callum Elliott of Bernstein says: “With any luck, this will perhaps dampen some of the fevered speculation of the past few weeks, albeit given the recent flurry of deal activity in the CPG space, we doubt things will be entirely put to bed.”

David Hayes of Jefferies believes plans can always change as it is “unlikely any management team would declare transformational ambition a year ahead of viability”.

He remains sceptical of how Unilever can create new value in the face of management reluctance to pursue big-ticket M&A. “Taken at face value, it fails to provide clarity on what boost to value creation is being realised beyond the heightened focus of New Unilever.”

But Ackerman notes Unilever has a clear blueprint for acquisitions. “They have to be digitally native brands. They have to be in a super growth stage. They have to be brands in which its R&D capabilities can add value to the innovation process. They have to be lifestyle brands and very strong in some narrow verticals to allow for exceptional profits. Fundamentally, they should also be brands that not only appeal to the American consumer but have the potential to travel abroad.”

Beyond the operational impact, ethical investment management firm Rathbones Greenbank highlights a potentially material change in Unilever’s sustainability profile, given the group’s leadership on nutrition governance, reformulation and responsible Marketing.

Researcher Lauren O’Leary points out there is no automatic transfer of these standards to the new McCormick-led group.

While broader elements around Packaging and plastic management will remain unchanged, there is a risk of undermining secondary links to health.

“During integration, nutrition targets, metrics and disclosures could be reset, redefined or temporarily deprioritised, and Unilever’s historic role as a progressive voice in food system policy – for example, around labelling and reformulation – may fragment or shift towards a more US-centric, category-driven approach,” she says.

“From a stewardship perspective, this means continuity cannot be assumed.”