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Spin offs work particularly well when the original corporate hodge podge obscures the value of one (or more) true gems. That isn’t the case with Unilever’s proposed demerger of its ice-cream business.
Instead of an uplift in valuation, the scoop-out may simply increase investor appetite for bolder action on the group’s bloated portfolio.
Unilever’s plan is best understood as the unwinding of a corporate footprint which made little sense in the first place. Ice-cream — which accounted for 13 per cent of Unilever’s total sales last year — has few synergies with the rest of the group’s home, food and personal care business. It is more capital intensive and volatile, with lower operating margins of 10.8 per cent in 2023, compared with 16.7 per cent for Unilever as a whole.
Yet scooping out the division will not — of itself — unlock value for Unilever’s shareholders. Imagine that the new ice-cream company traded in line with the valuation at which Nestlé sold Häagen-Dazs in 2019, and lop the resulting €17bn (£14.5bn) off Unilever’s current £118bn of enterprise value. That would leave the rump trading at 12.8 times forward ebit. That’s cheaper, but not miles away, from its current multiple of 13.4 times.
Such back-of-the envelope maths implies that financial engineering alone won’t cut the mustard. Unilever will need to improve its core business — comprising condiments such as Hellmann’s and Knorr, and cleaning products Cif and Domestos — if it is to narrow its valuation gap with peers.
New boss Hein Schumacher basically plans to run a tighter ship. He has nudged up growth targets, from the current 3-5 per cent to “mid single digits”, and announced £800mn of cost cuts. A smidgen comes from shedding lower growth ice-cream. The rest, one hopes, will come from new investment. Brand and marketing spend is on the up: from 13 per cent of sales in 2022 to 14.3 per cent last year. The cost cuts will create space for more.
The snag is that investors have been here before. Actually making the announced cost cuts and reinvesting the money profitably requires better execution than Unilever has managed in the past. Schumacher reckons the demerger will help by reducing complexity, improving focus and speeding up decision making.
If that really is the case, shareholders may soon be clamouring for Unilever’s management to hive off its food business and give the potentially higher-growth home and personal care segment their undivided attention.
camilla.palladino@ft.com