Unilever PLC (LSE:ULVR) shares fell almost 7% after it confirmed a deal had been struck to spin off its foods division into a combination with McCormick & Co Inc (NYSE:MKC).
The merger of Unilever Foods with the US spice group will create a $20 billion “global flavour powerhouse”, it said, while reshaping the FTSE 100 group into a home and personal care business.
As indicated in an earlier statement on Tuesday morning, the Anglo-Dutch consumer goods group will receive $15.7 billion in cash and retain a stake in the enlarged company, while also launching €6 billion of share buybacks.
The transaction values the foods arm, which includes sauces and condiments such as Hellmann’s, Knorr seasonings, and iconic European brands Marmite, Bovril, Colman's and Maille, at $44.8 billion and is expected to deliver $600 million of cost synergies within three years.
Chief executive Fernando Fernandez said the move “sharpens our portfolio and accelerates our strategy towards high-growth categories”. Completion is targeted for mid-2027.
Unilever and its shareholders will own a combined 65% stake in the enlarged company, with Unilever shareholders holding 55.1% and Unilever itself retaining 9.9%.
The consumer goods giant will be spinning off most but not all its foods division with foods business in India, Nepal, and Portugal excluded; its Lifestyle Nutrition business of vitamins, minerals, and supplements; its Buavita business; and its Lipton ready-to-drink business.
Analysts at Jefferies said the upfront cash would be "in reality a net debt transfer to NewFoodCo from Unilever" and the balance in McCormick equity.
Assuming the cash consideration is taken on as debt by NewFood Co, combined with McCormick’s existing net debt would leave NewFood Co with circa €17 billion of net debt, implying leverage of 3.9x earnings.
"This would result in an enterprise value of €52.7 billion," they calculated, implying a valuation of 12.2 times EBITDA is being applied for the Unilever foods business, close to previous estimates."
A full disposal would shift Unilever’s mix towards higher-growth categories, with around 70% of sales coming from Beauty, Wellness and Personal Care, above its stated target of 65%.
However, Jefferies cautioned that stranded costs and reduced scale, particularly in emerging markets, could prompt further dealmaking.
Analysts pointed to a possible merger with Haleon PLC (LSE:HLN, NYSE:HLN), potentially structured with 65% cash and leverage of about 3.5 times.
Such a strategy mirrors the approach long advocated by activist investor Nelson Peltz, whose Trian fund holds about 1.5% of Unilever and has pushed for portfolio simplification followed by scaling higher-growth categories.
** UPDATE: Deal confirmed, new details, share price details **