Here’s How Unilever Could Benefit From Acquiring Grom

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Global consumer processed goods behemoth Unilever (NYSE:UL) has extended its drive into the premium category by acquiring premium Italian ice cream brand Grom. [1] The move pushes Unilever deeper into the high-value, high margin strategy which so far had centered around the company’s personal care products business. The Grom acquisition adds additional firepower to Unilever’s Refreshments segment, which benefited from the acquisition of premium gelato brand Talenti last year. [2] The company did not disclose the terms of the transaction.

Our price estimate of $42 for Unilever is nearly the same as its current market price.

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Can Grom Revitalize Unilever’s Refreshments Division’s Flagging Growth?

The Refreshments division accounted for over 20% of Unilever’s total revenues in the second quarter of fiscal 2016. According to the company, the ice cream sub-segment accounts for a majority of the Refreshments division’s revenues and thus is the driving factor behind its performance. The company does not report revenues from ice cream separately.

The Refreshments division performed admirably in fiscal 2014, achieving underlying sales growth (non-GAAP revenue) of 5.3% year on year. This was next only to the 5.8% underlying sales growth of the Home Care division, which has consistently outperformed the other segments of the company. However, the Refreshments segment has lagged behind the other segments in the first two quarters of the current fiscal year. In the second quarter of fiscal 2016, its underlying sales growth was lower than even the Foods division, which has historically been a weak spot for Unilever.

We believe that Grom’s acquisition may not have a significant impact on the top line growth because of its relatively small size. However, it is likely to be margin-accretive for Unilever as the company’s product mix will skew increasingly towards the premium category. The acquisition of the Grom brand adds to the company’s already impressive portfolio of premium ice cream brands, which includes Magnum, Ben & Jerry’s, and Talenti. With the increasing preference for premium and organic ice creams in the developed markets, the revenue share of these brands is likely to overtake that of mass-category brands like the lower priced Cornetto line. As a result, a gradual but steady increase in margins due to the shift in product-mix is likely in the coming years.

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Notes:
  1. Unilever acquires Grom, Unilever Press Release, October 1, 2015 []
  2. Unilever acquires Talenti® Gelato & Sorbetto, Unilever Press Release, December 2, 2014 []