BREAKINGVIEWS-Unilever hot sauce gulp may be as tasty as it gets

By Aimee Donnellan

DUBLIN, March 20 (Reuters Breakingviews) - Too much hot sauce can often make a dish inedible. Unilever ULVR.L CEO Fernando Fernández will have to figure out how much spice he can stomach as he considers offloading the $134 billion consumer giant’s food business to much smaller rival McCormick MKC.N. The structure of the tie-up is unlikely to give Unilever the clean break from the slow-growing food sector that Fernández’s shareholders might want, but better offers may be hard to come by.

McCormick is the second food group to show interest in Unilever’s nutrition unit. Earlier this week, the Financial Times reported that Kraft Heinz KHC.O and Unilever considered merging their food businesses but ultimately the discussions ended. The McCormick talks are ongoing, though no timeline or price has been agreed. The U.S. suitor and spice maker is valued at nearly $19 billion including debt, whereas Unilever’s food unit could fetch around $44 billion, according to Breakingviews calculations.

It’s easy to see why McCormick Chairman and CEO Brendan Foley is interested in Unilever’s food unit. His company specialises in condiments like hot sauces and marinades, which complement Unilever’s Hellmann’s mayonnaise and Knorr stock cubes. Combining the two could deliver around $800 million of cost savings, equivalent to 10% of McCormick’s expected annual sales for 2026 of nearly $8 billion, one analyst reckons.

Still, the mismatch in their sizes will make any tie-up tricky. With leverage equivalent to nearly 3 times 2026 EBITDA, according to LSEG data, McCormick is unlikely to be able to use debt to buy Unilever out. The deal would instead more likely look like a reverse takeover, with the two food businesses merging, and Unilever or its shareholders being left with a sizable stake. If the two were meshed together with a similar level of gearing, 3 times EBITDA, then Unilever’s part would have an equity value of $32 billion, giving it a two-thirds share of the business. That would leave Unilever shareholders exposed to a complex integration and the food sector, which is barely growing and facing the threats of weight-loss drugs and consumers shifting towards cheaper and healthier alternatives.

Finding a deeper-pocketed and larger buyer would be preferable. But talks with Kraft Heinz appear to have stalled, and private equity firms are unlikely to be able to stomach such a large transaction when interest rates may be on the rise. Fernández will have to decide if a spicy deal is worth the heartburn.

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CONTEXT NEWS

Unilever said on March 20 it is in talks to sell its foods business to smaller rival McCormick & Company.

London-listed Unilever said it had received an offer from McCormick, while McCormick confirmed it was engaged in discussions with Unilever regarding a potential strategic transaction involving the food business.

Shares in Unilever were up 0.9% by 1011 GMT on March 20.