ANALYSIS-Unilever and McCormick investors find $65 billion food deal hard to swallow

By Yadarisa Shabong, Jody Godoy and Richa Naidu

BENGALURU/NEW YORK/LONDON, March 31 (Reuters) - Unilever ULVR.L and McCormick MKC.N shareholders found the reality of their planned $65 billion food deal hard to digest on Tuesday, perturbed by the transaction's structure, its long timeline to closing and the potential for antitrust scrutiny.

Shares in Unilever, owner of Hellmann's mayonnaise to Knorr stock cubes, fell by 7% after the deal was announced, wiping $7 billion from its market value while McCormick, owner of Cholula hot sauce, also took a hit as its shares slid by about 5%.

"The market, so far, has not reacted well to the news," said Chris Beckett, consumer staples analyst at Quilter Cheviot, a Unilever investor. He pointed to regulatory uncertainty and the challenge of integrating a sprawling new food business.

The deal, which is also not expected to complete until mid-2027, will be structured as a so-called Reverse Morris Trust (RMT), which offers tax benefits. Unilever will spin off its food division and then merge this with McCormick.

Unilever and its shareholders will end up with a 65% stake in the fully diluted combined company's outstanding equity.

"Unilever shareholders will still own a large chunk of the newly combined food company," Beckett said. "That large ownership block will be an overhang for a time to come."

Analysts at RBC Capital Markets, meanwhile, said the proposed structure was "hardly a clean exit" given that Unilever shareholders would still own 55.1% of the combined business. Unilever itself would hold onto a further 9.9% stake.

"We aren't overly impressed by what we can see," they said.

'WE TAKE A LONG-TERM VIEW'

Investors have for years pushed Unilever to sell its food business, with the sector under pressure as health-conscious shoppers move away from packaged food to fresh groceries.

The rise of GLP-1 weight-loss drugs has further eroded demand and investors' faith in packaged food, especially with stiff competition from cheaper private label brands.

McCormick CEO Brendan Foley was bullish when asked about the stock market reception to the deal.

"I'm not looking at the share price on a daily basis, we take a long-term view," he told journalists on a call.

The consumer sector has already been suffering from the month-old Iran war as freight and energy costs have risen, which also pushes up inflation for consumers and dampens demand.

Foley told analysts that McCormick remained confident in the deal's long-term fundamentals, despite geopolitical tensions and near-term pressure on consumer goods companies.

Some long-term Unilever investors were more supportive.

Aviva Investors' Harsharan Mann said the deal aligned with Unilever's aim to become more focused on beauty, while W1M portfolio manager Tineke Frikkee said the strategic direction was logical, but cautioned it could reduce economies of scale.

BNP Paribas Equity Research senior analyst Max Gumport said the drop in McCormick's share price was primarily down to investor concerns and the negative market response to the unusually large number of deals announced of late.

"While McCormick has a strong track record as an acquiror, large-scale M&A has rarely worked in the broader consumer packaged goods space," Gumport said.

ANTITRUST SCRUTINY?

Under U.S. law, the Federal Trade Commission (FTC) has 30 days from when a merger is reported to the agency to determine whether to issue a second request for information, which can expand deal timeframes while companies comply.

Last year, several food transactions closed without FTC challenges, including candy-bar giant Mars' acquisition of Cheez-It maker Kellanova K.N, and cereal manufacturer WK Kellogg's KLG.N acquisition by the owner of Ferrero Rocher.

Bill Kovacic, a former FTC chair, said the Unilever and McCormick deal would likely receive a close look by the FTC, because the agency is focused on mergers in industries that affect prices for U.S. consumers.

"Firms today know that if you fall within the defined set of industries of interest you are going to be examined more carefully than perhaps the others would be," he said.

"They ought to be able to come to a fairly quick decision about whether they need to look further," he added of the deal.