EXPLAINER-Why is Unilever looking to hive off its food business?

By Richa Naidu

LONDON, March 31 (Reuters) - Unilever ULVR.L said on Tuesday it was in advanced talks to combine its food business with spice maker McCormick MKC.N in a potential deal that would deliver $15.7 billion in cash and give shareholders majority control of the merged entity.

The potential move marks an acceleration of efforts to reshape Unilever under CEO Fernando Fernandez. More than one chief executive has tried to refocus the company's portfolio by expanding in personal care and beauty, and selling some food brands.

Unilever's shares are at their lowest since mid-2024 as investors and analysts worry Fernandez could be distracted from the day-to-day running of Unilever by the potential separation. And they have questioned ‌the benefits of such an action so soon after Unilever's protracted ice cream unit split.

HOW MUCH IS UNILEVER'S FOOD BUSINESS WORTH?

Unilever's packaged food business accounts for more than a quarter of group sales, but faces pressure from a shift away from ultra-processed products, competition from private label brands, and softer demand as the rise of weight-loss drugs changes consumer buying habits.

Home to Knorr bouillon powders and Hellmann's condiments, the division's underlying operating margin - which excludes the impact of foreign currency exchange rates - was 22.6% of revenue, outstripping the group's 20% margin last year.

The food business, which also makes Marmite spreads, reported ​an operating profit of 2.9 billion euros ($3.34 billion) last year, giving it an enterprise value of roughly 30 billion euros, according to Barclays estimates.

SLOWER TO GROW COMPARED WITH THE REST

The business, Unilever's second largest by sales after personal care, grew at 2.5% last year, more slowly than the rest of the group and well below the company's own mid-term goal.

Underlying sales growth at Unilever's foods division has lagged that of other units since the COVID-19 pandemic highs, repeatedly falling short of the company's annual goal of sales growth of between 4% and 6%.

Analysts and investors question the long-term prospects of the packaged food industry when politicians, including U.S. Health Secretary Robert F. Kennedy Jr., have highlighted the potential health risks of processed foods.

DEVELOPED MARKETS HAVE REACHED SATURATION

Part of the problem is that the business is operating in two contexts: developed and emerging markets. Unilever's food business is growing more slowly in North America and Europe than in countries such as India and parts of Latin America, where the group has a stronghold in food and private label products are less sophisticated, meaning they offer less competition.

Unilever said on Tuesday the proposed combination of its foods business with McCormick would exclude certain assets such as its operations in India. It did not provide further details.

"There is more growth in emerging markets, which accounts for 55% of food for Unilever, but it's still not enough to make up for Europe and the U.S. where the market is saturated," Barclays analyst Warren Ackerman said previously.

​