Unilever Foods is home to many loved names including Hellmann’s mayonnaise and Marmite, and the transaction will bring together a portfolio of brands with combined revenues of around $20bn.

The deal is structured as a Reverse Morris Trust-style cash-and-equity deal, a tax efficient transaction that involves spinning off an unwanted asset before merging it with an acquiring company. On completion, expected by mid-2027 subject to shareholder and regulatory approvals, McCormick Foods will become the global leader in flavours and condiments, while Unilever will emerge as a pure play Home & Personal Care (HPC) business. 

The market has received this announcement unfavourably, with shares of both companies down over the month. Investor concerns have centred around the timing and complexity of the deal amid heightened geopolitical and macroeconomic volatility. 

Price sensitivity has increased due to the energy shock caused by the war in Iran. This has put pressure on consumer staples, highlighted by recent development in Asia; Unilever Thailand has announced price reductions of up to 50% to protect volumes and market share. Although Thailand only represents 1% of group sales, similar trends are emerging in other Asian markets such as the Philippines, Indonesia and Bangladesh and could potentially affect 20% of group revenues should they become more widespread. 

There is an element of ‘restructuring fatigue’ following several years of portfolio change including the ice cream spin off last year and the sale of their tea division in 2022. Whilst they aren’t quite at RJR Nabisco levels yet, it is unsurprising that investors would like some evidence that Unilever can deliver decent underlying performance rather than selling off the laggards. 

Management have refuted concerns by stressing that the transaction is being announced from a position of strength and aligns with Unilever’s long term strategic direction to simplify their offering. Post transaction, Beauty, Wellbeing and Personal Care will account for two thirds of Group turnover (up from 50% today). This places a stronger focus on the higher margin HPC segment which has grown ahead of peers at 5% CAGR over the past three years and increase Unilever’s exposure to faster growth markets such as the US and EMs. 

The shift should also provide a more disciplined capital allocation focus: Unilever has already announced a €6bn share buyback programme and has capacity to pursue further bolt on acquisitions in beauty and wellbeing. Recent purchases of Dr Squatch in US men’s personal care and Wild, a sustainable refillable deodorant brand, demonstrate Unilever’s intentions to move further into premium brands. 

Whether Unilever’s latest move will improve focus or create further uncertainty is yet to be proven. We already own L’Oréal, the market leader in Beauty, Wellbeing and Personal Care, and have more recently been exploring other names in the HPC such as Reckitt Benckiser, whose turnaround story offers an attractive alternative. 
 

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