Unilever to Restructure, Raise Returns in Wake of Kraft Bid -- 6th Update
April 06 2017 - 2:57PM
Dow Jones News
By Denise Roland and Annie Gasparro
LONDON -- Unilever PLC added a big dollop of margarine to the
pile of packaged-food businesses up for sale around the world, as
the industry grapples with fast-changing consumer tastes and
slowing sales.
The Anglo-Dutch giant said Thursday it would divest its
margarine and spreads business -- a unit that analysts say could
fetch as much as $7.5 billion to $8.5 billion -- as part of a
broader restructuring. That effort includes cost-cutting, a
dividend boost and a share buyback, and is aimed at speeding up
returns after Unilever walked away from a $143 billion takeover
offer from Kraft Heinz Co.
The decision to part ways with margarine, a 145-year-old
business for Unilever, also comes at a time when packaged-food and
beverage titans around the world are struggling to appeal to
shoppers buying fresher food. Smaller brands, meanwhile, are
stealing shelf space. Food prices in many markets have been
falling, making it hard to compensate for lower volumes.
In February, Nestlé SA, the world's largest packaged-food
company by sales and an industry bellwether, abandoned its
long-running target for sales growth amid sluggish food revenue.
Last year, its prepared-food division, which includes brands like
Stouffer's and Lean Cuisine, grew just 2.7% stripping out currency
changes and acquisitions. In 2016, the company as a whole posted
its weakest comparable growth in at least two decades.
Last year "wasn't easy," said Nestlé Chief Executive Ulf Mark
Schneider at the company's annual meeting Thursday.
Companies have responded largely by cutting costs or shedding
their slowest-growing units. Private-equity firm 3G Capital
Partners LP, which gobbled up Kraft and Heinz, proved its
zero-based budgeting -- essentially justifying each expense from
scratch every year -- can squeeze out fatter margins amid weak
sales. Mondelez International Inc. has closed or sold 40 factories
in the last four years. Kellogg Co. recently said it has "chopped
and cut all the waste."
But the cutting can only go so deep, and is no longer enough to
offset the declining sales trends, said Bernstein analyst Alexia
Howard.
Even Kraft Heinz's margin expansion has slowed as of late, a
development that analysts say encouraged it to start looking for
big acquisitions like Unilever, where it can cut more fat.
Unilever had already embarked on its own version of zero-based
budgeting. On Thursday it said various new initiatives -- including
combining its foods and refreshments units, more efficient
marketing spending and supply-chain savings -- would allow it to
increase cost savings from an expected EUR4 billion ($4.26 billion)
to EUR6 billion through 2020. The company said it expects to
improve margins by at least eight-tenths of a percentage point this
year.
The company is aiming for 20% operating margins, excluding
restructuring, by 2020, compared with 16.4% in 2016. Unilever
shares ended up 1% in London.
But the company's biggest move was the decision to divest its
margarine and spreads business. An array of other food assets are
already up for sale as rivals pivot toward faster-growing
personal-care and home products, or try to maximize scale in the
food businesses they retain.
Reckitt Benckiser Group PLC on Monday put its food unit, which
includes French's, America's best-selling mustard, on the block.
Reckitt is consummating its $16.6 billion agreement to buy baby
formula maker Mead Johnson Nutrition Co. France's Danone SA last
week put its Stonyfield organic yogurt unit up for sale, seeking to
clear the biggest antitrust hurdle to its $10.4 billion acquisition
of WhiteWave Foods Co.
ConAgra Brands Inc., the owner of Slim Jim jerky and Chef
Boyardee canned pasta, spun off its frozen potato business and sold
its private-label division. It is considering divesting other
brands.
At Unilever's spreads business, which includes brands like
Country Crock and I Can't Believe It's Not Butter, sales have
declined steadily for years in developed markets such as Europe and
the U.S. That is despite attempts to restructure the business,
launch new products and buoy sales through marketing campaigns.
Still, Chief Executive Paul Polman had previously said he would
only consider selling the unit if he found someone willing to pay
the right price. That changed after the Kraft bid.
"We need to accelerate our plans to unlock further value,
faster," Mr. Polman told reporters Thursday. He said the Kraft
offer "raised expectations" among investors.
Margarine is no ordinary business for Unilever. The world's
second biggest consumer-goods company behind Procter & Gamble
Co., Unilever was founded in 1929 through the combination of a
British soap company and a Dutch margarine maker, which in turn
dates back to 1872. Unilever is the largest margarine seller in the
world.
Unilever could have a tough time selling the unit -- with sales
of $3.2 billion a year -- on its own, given today's headwinds,
including consumers' push for more natural foods. Since 2010,
Americans have chosen real butter over spreads and margarine --
reversing a decadeslong pattern.
Brian Blackstone in Zurich contributed to this article.
Write to Denise Roland at Denise.Roland@wsj.com and Annie
Gasparro at annie.gasparro@wsj.com
(END) Dow Jones Newswires
April 06, 2017 14:42 ET (18:42 GMT)
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