Key Takeaways
- Unilever is moving to become a “pure-play” home and personal care company with the sale of its foods division to McCormick.
- Shares have made the worst start to the year since the global financial crisis as investors worry about the company’s future outlook.
- Some fund managers says the strategic shift will play to Unilever’s strengths, but there are execution risks.
Consumer goods giant Unilever ULVR has grown into one of Europe’s largest listed companies by acquiring companies in the last few decades. Its latest move to jettison its foods division and become a “pure-play” home and personal care company has unsettled investors, and shares have made their worst start to the year since 2009.
The £33.2 billion deal to sell its foods division to US spice maker McCormick has been the trigger for this year’s share price weakness.
Some fund managers are concerned for a repeat of previous deals Executing the McCormick deal, which is likely to be completed next year, could be a risk to the investment case for Unilever in coming years, they say.
“Previous asset disposals were perceived to have taken a long time to separate and during those separation periods, trading was mediocre,” says Ninety One portfolio manager Will Nott. “The businesses were distracted and they weren’t executing to their fullest potential. Our concern with this transaction is exactly the same.”
What Will the ‘New’ Unilever Look Like?
Once the foods business sale is completed, the ‘new’ Unilever will house three core divisions:
- Beauty and Wellbeing—brands include Dove, Dermalogica, and Vaseline.
- Personal Care—brands include Tresemmé, Rexona, and Lux.
- Home Care—brands include Cif, Comfort, and Surf Excel.
Key Morningstar Metrics for Unilever Stock
- Morningstar Rating: ★★★★
- Economic Moat: Wide
- Fair Value Estimate: GBX 5,200.00
- Morningstar Uncertainty Rating: Medium
Unilever’s Transition Risks
Morningstar equity analyst Diana Radu says the sale to McCormick streamlines Unilever but pushes it into more competitive areas.
“While Unilever’s ambition to become a pure-play home and personal care company with more focused execution makes sense strategically, these categories are more fragmented and competitive than food, where Unilever has clear market leadership and established positions,” she says.
The share price weakness so far this year has left Unilever shares trading in 4-star territory, which means they are undervalued compared to Morningstar’s fair value estimate.
Unilever shareholders will retain a majority 55% holding in the combined foods business after its sale, and will therefore be looking for a smooth completion to the deal.
Investors Are Nervous About a ‘Sell and Replace’ Strategy
Following the latest deal, Unilever’s management were keen to stress they wouldn’t pursue large-scale M&A, which was the company’s previous modus operandi, instead continuing its strategy of “bolt-on” acquisitions.
“We were concerned they might use the disposal as an opportunity to do a back-to-back transformational acquisition—sell a large division, then buy a large one,” Ninety One’s Will Nott says.
Back in 2022, Unilever lodged a failed £50 billion bid for GSK’s consumer healthcare business, before it listed independently as Haleon. Further back, in 2018, food giant Kraft Heinz made an unsuccessful bid for Unilever.
“Disposing of a major division and simultaneously acquiring a new one is an enormous amount of organizational change, and frankly that probably would have been a step too far for us,” Nott says. “We were glad when management confirmed, at the time of the deal announcement, that they remain focused on bolt-on M&A. That’s something we do endorse.”
The Bull Case for Unilever Stock
Despite being happy with the business as it was, Nick Train, manager of the Bronze-rated Finsbury Growth & Income Trust FGT, welcomed the food spinoff.
“Unilever shareholders receive a premium valuation for the food division and participate in the cost savings and growth opportunities that will present to the combined and single focused food business,” he says. “Meanwhile, it seems realistic to expect ‘new’ Unilever to both grow more quickly and command a higher rating, as it shrinks itself into a pure-play home and personal care company.”
J O Hambro Capital Management fund manager Tom Matthews says there are some concerns about the loss of value through the sale.
The new entity “is going to be a much simpler business with thematically better tailwinds,” he says.
“In terms of those end markets that they’re playing into, it plays much more into the world that we live in today, which is always on, social media-led marketing. That’s something that Unilever has become very good at. I think that plays less to selling stock cubes and plays a lot more into beauty.”
Unilever is no stranger to buying and selling within its portfolio of brands, with the spinoff of ice cream business Magnum completing last year. It followed the sale of the teas business in 2021 and spreads in 2018. The company created separate food and personal care divisions as far back as 2001.
“Where we take some comfort is in the Magnum precedent,” Ninety One’s Nott says. “Magnum traded well through the period when it was clear it was being spun off—a new management team was established, the entity was stood up independently, and it traded quite competitively in terms of market share dynamics through 2025.
“That’s the template we’re looking for here: Whether Unilever can continue to run the core home and personal care business effectively while not dropping the ball on foods.”
Unilever Share Price Is Exposed to India’s Consumer Growth Story
The transition also increases Unilever’s already high emerging markets exposure.
Among the largest fast-moving consumer goods companies globally, Unilever has a uniquely strong presence in emerging markets, with 59% of sales exposure.
India is viewed as a key growth engine for the firm moving forward through subsidiary Hindustan Unilever.
“If Unilever can execute in India at the growth rates management is targeting—high single digit, possibly low double digit organic growth—then India alone could grow to represent mid-to-high teens of the total business over time,” Ninety One’s Nott says.
“If you believe in the long-term potential of the Indian middle class growing to be broadly comparable to China, there are decades of growth in that geography ahead for this portfolio, according to Nott. “The combination of an undemanding valuation and these unique growth engines is what makes it genuinely interesting. The caveat, of course, is that emerging markets are more volatile.”
