What To Make Of Unilever’s Sale Of Its Spreads Business

Unilever (NYSE:UL) recently announced that it will be selling its spreads business to KKR for about $8 billion (€6.825 billion) on a cash-free and debt-free basis. The deal is expected to close by the middle of 2018. Unilever had announced its plans to divest the spreads business in April, largely to boost shareholder returns after refusing a $143 billion takeover from Kraft Heinz in February. The company is cutting costs, buying back shares, and increasing dividends to appease its investors. It has not been able to generate significant growth from the spreads business of late, which explains this move in large part.

Food is the second largest contributor to Unilever’s revenues, accounting for almost 23% of its total valuation, per our estimates. However, the division has been facing some heat for a while now, due to the underperforming spreads business and slow economic growth in certain geographies. Accordingly, Unilever was looking to sell off the spreads segment and was reporting its food sales excluding spreads from the first quarter of this year. In the first nine months of fiscal 2017, the company’s food division (including spreads) saw organic sales growth of 0.9% year-over-year with negative volume growth. However, the company reported 2.2% growth, along with better volumes, after excluding spreads from the results.

Our $54 price estimate for Unilever’s stock is slightly below the current market price.

Focus On Organic Food Business

Unilever bought Sir Kensington’s in April, which is known for producing natural non-GMO condiments. In addition, the company also signed an agreement to acquire Brazilian natural and organic food business Mãe Terra. These acquisitions indicate that the company is looking for high-growth products that can help diversify its offerings and boost growth. In fact, the natural food market could provide a bigger growth opportunity to the company, as the global organic food market is expected to grow at a compound annual growth rate (CAGR) of over 16% through 2020, much faster than the global packaged food market, which is expected to grow at 4.5%.

Unilever’s food division’s contribution to the company’s total EBITDA has declined significantly, from 41% in 2010 to 27% in 2016. However, we expect the company to recover from the sharp decline due to its focus on cost-saving programs, and the divestiture of its spreads business.

See our complete analysis for Unilever here

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