Unilever exploring options to restructure food business

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Unilever (NYSE:UL) is exploring options to restructure the food side of the company’s business, including potential divestitures of its low-margin food businesses, a source familiar with the situation told mergermarket.

Earlier this year, the Netherlands and UK-based consumer giant started evaluating options for its so-called condiments business, which includes Hellmann’s Mayonnaise and its cooking oils and spreads, for a possible divestiture, said two industry bankers.

Unilever’s board is concerned about the company’s dependence on food product sales in North America and Western Europe, where food consumption is slowing down, and the slowdown has weighed on Unilever’s valuation, said the source familiar.

One of the options the company has looked at in recent months is reducing Unilever’s North American food business, the source familiar said. The company’s North American food business has shown no growth in the past two years, the source added.

Unilever does not break out financials for its North American food business, but its revenues for the Americas rose 2.4% to EUR 7.4bn in the first half of 2011; its revenues from Western Europe increased by 1.3% to EUR 6.1bn in the same period. Within food, the company’s savory dressings and spreads segment around the world saw sales decline by 1.1% to EUR 6.8bn, while its ice cream and beverages segment saw sales grow by 4.6% to EUR 4.7bn.

Officials at Unilever declined to comment. The firm reports third quarter results tomorrow, 3 November.

The company has worked with multiple investment banks on various aspects of the effort to reduce its food portfolio, the source familiar and the two bankers said. Unilever sought advice a few months ago to explore ways to rebalance its food and household and personal products sides of the company, said the source familiar.

Unilever is continuing to evaluate its condiments business in particular, which includes its Hellmann’s Mayonnaise brand, as well as margarine, cooking oils and spreads, though the company has not yet made a decision to divest the segment, said one of the industry bankers.

Unilever does not break out the revenues and earnings of Hellmann’s Mayonnaise and its margarines and spreads, but those products fall under the company’s Savory Dressings and spreads segment. Hellmann’s and Unilever’s margarine and cooking oils generated USD 400m to USD 500m in EBITDA annually, and Hellmann’s accounts for about 20% of the figure, said the first industry banker. Unilever also owns Bertolli olive oil and the Country Crock, Becel, Flora, and Rama margarine and spreads.

There was strong interest from one buyer in Hellmann’s earlier in the year before credit markets became challenging for acquirers, said the source familiar. Bunge, an agribusiness company with a large food ingredients segment focused on cooking oils and spreads, is a possible buyer for Unilever’s Hellmann’s mayonnaise, margarines and cooking oils, said the second industry banker.

Unilever has been exploring the sale of its condiments business, but the idea emanated from Unilever’s effort earlier this year to orchestrate a takeover of Reckitt Benckiser, and it’s not clear Unilever is still considering the divestiture, said a second banker. Unilever reportedly explored making an offer for Reckitt Benckiser last July.

Unilever would need to offload a large asset in order to finance a bid for a company as large as Reckitt, said the second banker. Reckitt Benckiser’s market cap is GBP 14.5bn, and Unilever’s is USD 92.8bn.

Despite recent rumors and news reports that Unilever will split up the company into two companies, one focusing on food and the other on household products and personal care, this transaction is not part of the plan currently, said the two industry bankers.

The company views the two business too integrated in emerging markets, which is a region that is driving growth at the company, to separate. It is difficult to separate the two businesses, but it is something the company is continuing to consider, said the first banker. Unilever will continue to be an aggressive acquirer of household and personal care businesses, said the second banker.

Unilever’s food side generated EUR 2.9bn to EUR 3bn in EBITDA in 2011, and at a multiple of 10x where most branded food companies trade, the food division would be valued at EUR 30bn. The company’s household personal care side generates about EUR 4.6bn in EBITDA, and at a valuation of about 10x to 11x EBITDA, that side would be worth EUR 46bn to EUR 50bn. Thus the food and household personal care sides together are worth EUR 76bn to EUR 80bn, which is roughly equal to the company’s market cap of EUR 69bn plus EUR 8bn in debt.

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