Unilever's McCormick deal looks neutral at best, JPMorgan warns
Unilever PLC's (LSE:ULVR) potential sale of its foods division to American spice giant McCormick may disappoint investors despite its strategic appeal, according to analysis by JPMorgan.
The US bank sees the deal as broadly "neutral to value creation", while bringing meaningful execution risks.
On Friday, the FTSE 100 group said it had received interest in the division and was in talks with McCormick.
The transaction is thought to be structured as a so-called 'reverse Morris Trust' – a tax-efficient deal mechanism in which Unilever shareholders would receive shares in a newly listed foods company rather than cash, with Unilever itself receiving only around €12 billion in cash, roughly 30% of the total consideration.
McCormick, best known for its herbs, spices and condiments, would absorb Unilever brands including Hellmann's, Knorr and Marmite.
JPMorgan estimates tax leakage of around €4 billion, while 'dis-synergy' costs and lost efficiencies from separating the business were valued at around €9 billion, far outweighing estimated synergies of €4 billion on the McCormick side.
The bank also flags that the deal leaves Unilever with a smaller balance sheet and reduced financial firepower for future acquisitions, at a time of heightened uncertainty around emerging markets.
Timing is another concern: Unilever has only just completed what JPMorgan describes as its "biggest restructuring ever", following the earlier separation of The Magnum Ice Cream Company (EURONEXT:MICC, LSE:MICC, NYSE:MICC).
"Net-net, while we see the strategic rationale to advance Unilever’s portfolio transformation, we believe the timing is not ideal, while the deal may disappoint given the lack of substantial upside with execution risks at a time of increased worries on impact on EMs from the current crisis and we also point to a curtailed balance sheet that may restrict potential for future investments," analysts concluded.