Unilever Is Smart To Spin Off Ben & Jerry's And Magnum

(Bloomberg Opinion) -- Unilever Plc is cutting the fat — in every sense. Chief Executive Officer Hein Schumacher plans to spin off its ice-cream business, including the Magnum and Ben & Jerry’s brands, to focus on higher growth categories such as premium beauty.

It’s the right thing to do. But Schumacher, who’s been in charge since July, shouldn’t end his restructuring there, nor can he afford any slip-ups in the underlying performance of the consumer giant.

After underwhelming investors with his strategic vision last October, Schumacher has quietly set about streamlining the portfolio. In December, he sold a collection of brands including Q-Tips and Timotei shampoo for an undisclosed sum.

On Tuesday, Schumacher said the company would separate its ice-cream division, which generated sales of €7.9 billion ($8.5 billion) last year. While the unit has some muscular brands, it’s struggled since the pandemic disrupted restaurant visits and holidays, and is also suffering amid unpredictable weather. The business expanded sales by 2.3% last year, compared with more than 8% for beauty and well-being and personal care.

A deal would also rid Unilever of Ben & Jerry’s, which has become something of a headache in recent years because of its  semi-independence from its parent.

Unilever said a demerger was the most likely route to separation. But by announcing a spinoff, the company has in effect put the unit up for sale. Private equity is already involved in the category, so it would be a natural buyer. Rival Nestle SA’s ice-cream business is owned through a joint venture with PAI Partners.

Unilever’s ice-cream operations would be a sizable bite, though. They’re expected to generate underlying operating profit of €929.9 million this year, according to the Bloomberg consensus of analysts estimates, which could mean earnings before interest, tax, depreciation and amortization of about €1.4 billion. Putting this on a peer multiple of 12 times would mean an enterprise value of about €17 billion.

One of the problems with separating Unilever’s food businesses has been the extra costs involved, as benefits of scale are lost. But Schumacher is addressing this through a plan to save €800 million over the next three years, by cutting 7.500 jobs. This should help to solve the problem of so-called stranded costs.

But Schumacher shouldn’t stop at ice cream. Unilever still has some food brands, including Hellmann’s mayonnaise and Knorr stock cubes, which look increasingly at odds with its beauty and personal care focus. Homecare is also slow growing, while even some parts of the personal care arm, such as toothpaste, may benefit from pruning. Some recent acquisitions, such as Smartypants vitamins and Murad skincare, are also not performing.

What’s more, the CEO has upped his medium-term sales growth target, from 3% to 5% to mid-single digits, once the separation is complete. True, ice-cream is growing more slowly, so eliminating the unit will automatically elevate revenue expansion. Meanwhile, the cost-saving plan should help to make Unilever less cumbersome in the way it operates. He has also pledged to modestly boost margins.

But increasing the guidance risks making Schumacher a hostage to fortune. The previous target was roughly in line with peers and gave him scope to outperform. That wiggle room is now gone.

After under-promising on the portfolio in October, Schumacher has already over-delivered. Now he must do the same when it comes to not just juggling the businesses Unilever owns, but how much Dove self-tan and Hourglass lipstick it can actually sell. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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