Company answers calls to boost returns by putting its spreads business on the block

By Denise Roland and Annie Gasparro 

LONDON -- Unilever PLC added a big dollop of margarine to the pile of packaged-food businesses up for sale around the world, as the industry grapples with fast-changing consumer tastes and slowing sales.

The Anglo-Dutch conglomerate said Thursday it would divest its margarine and spreads business -- a unit that analysts say could fetch in the range of $7.5 billion to $8.5 billion. The move is part of a broader restructuring, including cost-cutting, a dividend boost and a share buyback, that aims to bolster returns after Unilever walked away in February from a $143 billion takeover offer from Kraft Heinz Co.

The decision to part ways with margarine, a 145-year-old business for Unilever, comes as packaged-food and beverage companies around the world are struggling to appeal to shoppers now favoring fresher food. Smaller brands, meanwhile, are stealing shelf space. And food prices in many markets have been falling, making it hard to compensate for lower volumes.

Unilever's move adds to the array of food assets already up for sale as rivals pivot toward faster-growing personal-care and home products or focus on building up certain food lines. Reckitt Benckiser Group PLC earlier this week put its food unit, which includes French's, the best-selling mustard in the U.S., on the block. Reckitt agreed to buy baby-formula maker Mead Johnson Nutrition Co. for $16.6 billion. France's Danone SA last week put its Stonyfield organic yogurt unit up for sale, seeking to clear antitrust hurdles to Danone's $10.4 billion acquisition of WhiteWave Foods Co.

ConAgra Brands Inc. -- the owner of Slim Jim jerky and Chef Boyardee canned pasta -- spun off its frozen-potato business and sold its private-label division in 2016. It is considering divesting other brands.

On Thursday, Unilever said various new initiatives -- including combining its food and refreshment units, more efficient marketing spending and supply-chain savings -- mean it can increase its cost-savings projection through 2020 to EUR6 billion from EUR4 billion ($4.26 billion). The company said it expects to improve operating profit margins by at least eight-tenths of a percentage point this year from 16.4% in 2016. The company is aiming for 20% operating margins -- a measure that excludes restructuring costs -- by 2020. Unilever shares rose 1% in London trading on Thursday.

Unilever Chief Executive Paul Polman said the competitive landscape is changing fast and "we must ourselves continue to change so that we can continue to compete with our model but do so harder and faster."

The company's biggest move was the decision to shed its margarine and spreads business. At Unilever's spreads business, which includes brands such as Country Crock and I Can't Believe It's Not Butter, sales have declined steadily for years in developed markets such as Europe and the U.S. That is despite attempts to restructure the business, launch new products and buoy sales through marketing campaigns. Still, Mr. Polman had previously said he would consider selling the unit only if he found someone willing to pay the right price. That changed after the Kraft bid.

"We need to accelerate our plans to unlock further value, faster," Mr. Polman told reporters Thursday. He said the Kraft offer "raised expectations" among investors.

Margarine is no ordinary business for Unilever. The world's second biggest consumer-goods company behind Procter & Gamble Co., Unilever was founded in 1929 through the combination of a British soap company and a Dutch margarine maker, which in turn dates back to 1872. Unilever is the largest margarine seller in the world.

Unilever could have a tough time selling the unit -- with sales of $3.2 billion a year -- on its own, given Americans have chosen real butter over spreads and margarine, reversing a decadeslong pattern.

Consumers' preference for fresh food has also hurt Nestlé SA, the world's largest packaged-food company by sales and an industry bellwether. In February, Nestlé abandoned its long-running target for sales growth amid sluggish food revenue.

Last year, its prepared-food division, which includes brands like Stouffer's and Lean Cuisine, grew just 2.7% excluding currency changes and acquisitions. In 2016, the company as a whole posted its weakest organic sales growth -- a measure that strips out currency fluctuations, acquisitions and divestments -- in at least two decades.

Last year "wasn't easy," said Nestlé CEO Ulf Mark Schneider at the company's annual meeting Thursday.

Nestlé and other consumer-goods conglomerates, such as P&G and General Mills Inc., have shed underperforming brands in recent years as a quick way to boost profitability and focus on those with more growth potential.

Private-equity firm 3G Capital Partners LP, which gobbled up Heinz in 2013 and Kraft in 2015, proved that its zero-base budgeting -- essentially justifying each expense from scratch every year -- can yield fatter profit even amid weak sales. Mondelez International Inc. has closed or sold 40 factories in the last four years. Kellogg Co. recently said it has "chopped and cut all the waste."

But the cutting can only go so deep, and it is no longer enough to offset the sales drop-off, said Bernstein analyst Alexia Howard.

Even Kraft Heinz's margin expansion has slowed, a development that analysts say prompted it to start looking for big acquisitions like Unilever, where it could have tried to do more cost-cutting.

Kraft Heinz said in February that it "is focused on reinvesting more of our dollars where they directly impact our business -- our brands, our products, and most importantly, in benefiting our consumers."

Brian Blackstone in Zurich contributed to this article.

Corrections & Amplifications Unilever has stock listings in London and Amsterdam. An earlier version of this article incorrectly stated that its Dutch listing was in Rotterdam, the location of its Dutch registered office. (April 6, 2017)

Write to Denise Roland at Denise.Roland@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

 

(END) Dow Jones Newswires

April 07, 2017 02:47 ET (06:47 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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