Commentary

Betting Against Its Spreads, Unilever Will Slash Costs, Buy Back Shares

Unilever announced yesterday that it would stay unified, squelching rumors that an intense review after it fended off a takeover bid from Kraft Heinz would lead to its splitting into two companies. Instead, it will sell off its venerable margarine and spreads business, slash costs and initiate a share buyback of €5 billion. 

Or, as its communication team deftly puts it in the headline of its news release, it will embark on “Accelerating sustainable shareholder value creation.”

Indeed, CEO Paul Polman believes divvying up the company “would only harm the consumer goods maker's value creation,” according toCNBC.com. “The splitting of our food business from the rest of our business would frankly lead to an enormous amount of dis-synergies and less opportunity of value creation in our opinion,” he said during a live interview with the network. 

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“Unilever, one of Europe's biggest blue-chip stocks, called the Kraft episode a ‘trigger moment’ to deeply review its business, as global packaged goods makers face slowing growth and more competition from start-ups exploiting evolving tastes for natural and healthy products,” writes Martinne Geller for Reuters.

“There is no doubt that however … opportunistic [the Kraft approach] was, it did raise expectations,” Polman said, Geller reports. “We are absolutely determined to use it as an opportunity to place Unilever on an even stronger footing.”

Polman, a Dutchman who has led Unilever since 2009, said that it would “continue to invest in its brands for long-term growth. Two-thirds of planned savings of €6 billion by 2019 — up from €4 billion before Thursday’s announcement — will be reinvested,” reports Scheherazade Daneshkhu for Financial Times.

“Explaining how Unilever had managed to find the additional savings since last year, Graeme Pitkethly, finance director, said: ‘There is no doubt that we erred on the cautious side. It’s in the nature of a Scotchman and a Dutchman, I think, to do that.’”

But now that it is feeling bolder, it will cut the number of advertisements by 30%, slash its worldwide roster of 3,000 agencies by half and curtail consultants by 40%, Daneshkhu writes.

The proposed sale of the spreads business, which the company has been in for 145 years, “represents the latest blow for butter alternatives, which most think of as ‘margarine,’ even if some don’t technically conform to the federal definition of the word,” according to an AP story in USA Today.

Among its brands are Country Crock and I Can’t Believe It’s Not Butter; ConAgra, which sells Blue Bonnet and Parkay, would be one prospective buyer. If the company can’t find a buyer, the business will be spun off, Unilever said. 

“The company has had ‘lots and lots’ of approaches from private-equity firms and is confident it can sell the unit at a favorable price,” Pitkethly told Bloomberg’s Thomas Buckley by phone. It is worth about €7.5 billion, according to Natixis analyst Pierre Tegner.

“Margarine enjoyed popularity for decades before research emerged in the 1990s about the harms of the trans fats. Many manufacturers have since reformulated their spreads sold in tubs to remove trans fats, but the bad health associations have persisted,” the AP story continues. “In the meantime, butter has benefited from the trend toward foods people see as ‘real’ and consumers’ greater willingness to accept more fat in diets.”

“The decision to part ways with margarine … comes as packaged-food and beverage companies around the world are struggling to appeal to shoppers now favoring fresher food. Smaller brands, meanwhile, are stealing shelf space. And food prices in many markets have been falling, making it hard to compensate for lower volumes,” observe Denise Roland and Annie Gasparro for the Wall Street Journal.

“Unilever’s move adds to the array of food assets already up for sale as rivals pivot toward faster-growing personal-care and home products or focus on building up certain food lines,” they continue, citing several prominent examples. 

Meanwhile, Unilever’s Dove brand is rolling out its new Baby Dove line in the United States. Marketing Daily’s Sarah Mahoney tells us all about its #RealMoms campaign.

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