Unilever, as market leader, owns five of the 10 biggest brands. The other five come from Nestlé, with which it owns 30 percent of the market share. Despite its market position, the business is being spun off. The formerly British-Dutch company wants to focus more on parts of the business that fit within the so-called "complementary operating models. Ice cream has a strong seasonal character and targets both indoor and outdoor consumption. It also has a very specific production chain, with the cooling elements also being quite capital intensive. In terms of operations, this is not complementary to other parts of Unilever such as beauty and wellness, personal care, home care and food.

Historical Breakdown of Revenue by Business Segments Source: MarketScreener

Source: MarketScreener.com

In doing so, Unilever has stated in its growth action plan that it wants to go to a high-margin, high-growth, simple, efficient company. That's not where it belongs either. In the last two financial statements, ice cream has a 13 percent revenue share. This is smaller than the four areas mentioned. On the other hand, depreciation and amortization is much higher. Thus, at 24 and 31 percent, respectively, it is clear that ice cream is a capital-intensive industry. And all this while operating results are disappointing. At 9 percent and 8 percent overall and with no clear new growth opportunities in sight, ice cream brands no longer fit the bill. Especially with the numbers in mind.

Takeover or IPO?

But this was clear for quite a long time. Back in March it was known that by the fourth quarter of 2025 the entire branch must be gone for good. The only question is how. The original plan was for the new company to have an IPO. This gives financial and managerial freedom, while still allowing it to stay close to the parent company. For example, it can keep part of the shares or give its shareholders shares in the new company. A so-called spin-off already has many examples such as Ferrari (from Fiat), PayPal (from eBay) and Siemens Healthineers (from Siemens AG). In these, shareholders of the original company were given shares in Ferrari and PayPal, while Siemens AG remained a minority stake.

Now private investors and banks are also lurking. It already came out in late November that talks with private-equity firms about an 18 billion euro bid had folded. The banks, meanwhile, are hoping that Unilever will still choose to abandon the original IPO. They would now have around 9 billion euros available, which is around six times EBITDA. To get to the bid from private companies, even more needs to be raised.

They want to achieve this through a leveraged buyout (LBO). With this, the purchase is funded primarily by outstanding loans and bonds. Because of leverage, an LBO can have very high returns. The company's high debt must be repaid primarily through higher profits. This can be achieved by reducing costs, for example, or capital from its own IPO.

Well-known positive examples of LBOs are NXP Semiconductors and Kraft Heinz. NXP Semiconductors, as part of Philips, was acquired in 2006 for $9.4 billion through a partnership between KKR and Silver Lake. Kraft Heinz is a merger that came about after an acquisition of Heinz by 3G Capital and Berkshire Hathaway in 2013. Both companies quickly became publicly traded and show many similarities associated with an LBO: high debt in the beginning with a brief rise in revenues.

If this is not the case, a situation like that of RJR Nabisco could arise. KKR, along with other investors, acquired the food and tobacco company in 1988 for $25 billion with only borrowed money. Due to an excessively high purchase price, $109 versus a starting bid of $75 per share, debts were too high to be paid off. The company was quickly spun off and sold. This case does tell that there must be clear advantages for the LBO to succeed.

 

In doing so, new growth opportunities seem to be lacking. No prospect of improved efficiency because ¨the production chain is very specific to ice cream¨ was previously a reason for investors to exit. In its place, however, it remains a world-renowned and stable brand. With 10 percent sales growth (4.3 percent expected) from the third quarter of 2023, the company continues to grow despite low margins. Whereas 2024 will not be known for its major mergers and acquisitions, falling interest rates may cause banks to take more risk.

In addition, Unilever acquisitions are not new: First, Flora Food, which specializes in butter and spreads, was sold to KKR in 2017 for 8 billion euros in 2017. Four years later, it was Ekaterra's turn: CVC Capital Partners acquired the tea company for 4.5 billion. Since then, these companies have been able to focus more on sustainable growth: For example, they are focusing on plant-based spreads and sustainable and regenerative farming methods.

There are several advantages and disadvantages to both cases. An IPO is preferable for the time being, also because Unilever can retain a minority stake. It also remains to be seen whether the bid for an LBO is sufficient and whether the debts can be paid off. Still, it is not often that a market leader is for sale, and with lower interest rates, banks are lurking. Time will tell.

By Floris de Vries