Will the $65bln Unilever-McCormick Food deal create value?

Speaker A: Welcome to the Mergers and Acquisitions Podcast. M and A covers many aspects and disciplines, and over the past 20 or so editions of this podcast, most have been covered with a wide range of outstanding guests. In fact, I don't think there's that much that we have forgotten. But if I'm wrong about that, please let me know. You will have noticed that learning to do better deals and also to do deals better has become a key theme. As we know that many deals don't create the value that they promise. But learning can be done in many ways. And I thought in this episode we'll take a slightly different approach. We'll use the example of one specific actual deal, analyze it, and draw some learnings that may be useful for all of us. The deal in question is the $65 billion merger of the food business of European company Unilever with the American company McCormick, which specializes in flavor, which was announced in March 26th. With me in the studio is a guest I wanted to have here for a long time, Richard Oblat. Richard and I have worked together off and on, um, in these M and A teams off shell for some 15 years and I've shared the highs and lows of deal making with him on many occasions in late night negotiation sessions, shared offices, meeting rooms and airports, and through every sort of phone, video and other virtual connection. In addition, since leaving Shell, Richard has built up a portfolio of activities and today, among others, he serves as non executive chair of H2 Transition Capital, an emerging global fund focused on developing, managing and investing in the hydrogen value chain. Richard is also a non executive director of Kennex Energy, that's a gas distribution company in Northern Ireland, and of hior, a firm focused on commercializing hydrogen propulsion technologies for heavy duty applications. Richard is also a trustee, executive board member and the chair of the Technology Communities Board of the Institute of Materials, Minerals and Mining. During his industrial career, Richard worked for the Goodyear tire and Rubber Company for 14 years and then with Shell for 25 years, of which a large part was associated with all forms of MA. Richard was accountable for over 50 deals from as small as $10 million to up to $10 billion with every different counterparty you can think of in almost any geography in the world. Richard, welcome to the podcast studio.

Speaker B: Thank you, Hughes. Um, I'm delighted to be here.

Speaker A: Well, before we start, can you please explain how you got into M and A and why you could not let go of it once you had found out about it?

Speaker B: Yeah, Let me start by saying the way I talk about M and A with Some of the clients I've consulted with, when they ask me how to improve their M and A division or doing M and A, and I tell them, do not follow my example. I started M and A in absolutely the worst way, in my opinion. I had three different assignments at Goodyear where I was leading businesses that required fixing in. In each one of them, a divestment was eventually decided upon and I led them as the business leader. There was no M and A department. I was at, uh, best, a gifted amateur. The benefit was I was learning by doing. My fourth transaction was in a business that required a different owner to grow. It was becoming unloved by Goodyear. It was the sale of PET to Shell, which is how I joined the company and where I met Juhus. Shell then decided to restructure its chemical businesses in 1999, divesting 40% of the division. I was one of very few within the business unit with M and A experience and thus became one of the three individuals who led these transactions. A few other leadership assignments followed in Shell before I transitioned to a nascent M and A team being formed in the downstream segment of the organization. I worked firstly in Asia, then the Americas and then globally working on larger, uh, M and A deals, working for Juhus.

Speaker A: Thank you. And, uh, today we're going to try and apply your extensive deal experience to the Unilever McCormick deal. We've both done some homework, so would you mind giving a brief background to the companies and to the deal?

Speaker B: Yeah. Starting with Unilever and its history. Unilever's roots were a Dutch margarine company, uh, known as Margarine uni, formed in 1860. In 1930, it merged with a British soap company, Lever Brothers, to form Unilever. They grew quite rapidly to become a global consumer packaged goods company with sales in 190 countries. Its stated purpose together was to meet the everyday needs of people everywhere. In 2000, it split itself into two main divisions, food and then home and personal care, the latter being higher growth, which post 2010 became the corporate focus. They reduced the food division through divestments from 50% of the company to about 35%. The key transactions were they sold margarines and spreads, one of their heritage businesses, to KKR in 2016 for about $8 billion, a, uh, large part of the tea business, to CVC in 2022, about four and a half billion. Then last year they spun off the ice cream business, which is about a $15 billion spinoff. In March, Unilever's focus on home and Personal care was accelerated in the transaction. We'll discuss today. They announced the formation of a $65 billion sauces to spices company, merging Unilever Foods with a much smaller McCormick and Company. They excluded India, Portugal and Nepal for reasons that are not quite apparent. The new co will retain the McCormick name, the chair and the CEO and CFO will also come from McCormick. They will be using a tax efficient reverse. Morris Trust closing is targeted in mid-2027, subject to the usual works Council consultations in some jurisdictions and shareholder and regulatory approvals.

Speaker A: Richard, this looks to me very much like a sale of the remaining food business to McCormick. But the structure is really interesting because Unilever shareholders will become shareholders in the merged company. So it looks like a merger five followed by a split. So when did you think actually Unilever's strategy started to change?

Speaker B: Unilever had a strategic shift from about 2000 onwards. And I studied this by looking at their annual reports each year from 1999. The shift was led by three different CEOs, firstly under Patrick Seskow and then Paul Polman's launch of the Sustainable Living Plan. The focus there was on environmental impact and de emphasizing the foods business. The third CEO, uh, Alan Juppe's background was home and personal care and this accelerated the shift.

Speaker A: So this deal will deliver the disposal of the remaining food business for Unilever. Do you think it was difficult for Unilever to sell these businesses?

Speaker B: I think it was. Some segments were highly sought, such as the ice cream division. But it appears Unilever's hold value for many of the business units within the food division were unrealistic and it was not clear who would pay a premium for this strong food segment. Also seen by others as, uh, slower growth as well as by Unilever. They started to look at a spinoff following the success of the ice cream transaction. And during their work looking at a spin off, they received inbound interest from the much smaller McCormick, effectively combining a spin off and a sale.

Speaker A: So I can just imagine the Unilever team scratching their heads on how they can make this final disposal under quite some pressure as well because it's already been announced by the management. So it must have been a gift from heaven when McCormick knocked on their door. But then McCormick, as you said, is so much smaller than the food business of Unilever. There's going to be a really complicated factor here. How do you pay for it? So let's start first. Where did McCormick's interest come from?

Speaker B: So I think McCormick's rationale was that they have continuously emphasized their shareholders continuing investments in core categories to boost growth margins and increasing overall profitability. And in fact they've had a history of rather good small incremental transactions and acquisitions to grow. As well as growing each business unit themselves. Unilever provided a step out from the core of McCormick of flavor and a complementary presence in the retail and food service channels, especially in Asia Pacific and Latin America. And it was the linking of iconic brands, especially for cooking at home. It's interesting to note McCormick's corporate purpose, which I don't think will change, which is to make life more flavourful.

Speaker A: And how has the market reacted since the deal was announced in March 26?

Speaker B: I think the headline here is not. Well, there's a lot of negative press in the EU from disgruntled staff and shareholders in publications like the Financial Times and the like. The share price, Unilever's share price fell on the announcement and has not fully recovered. A major investor, Terry Smith, fully divested and he and others cited undervaluation of the transaction for unilever and whether McCormick would maintain the high sustainability targets which many of the shareholders supported. McCormick's shares have also traded somewhat lower but, but there have been positives noted, particularly in the US with the beneficial tax positioning that this transaction includes. McCormick's history of positive integration of acquisitions. It's not a consolidation but a complementary transaction including very strong global brands in Unilever. Uh, they will probably have a more disciplined capital allocation program going forward. It seems to me that there is in, uh, no sense in the market that, uh, this deal is accretive to either party. In Shell, we would always ask ourselves, how can a deal create value? Hus, what do you make of this transaction?

Speaker A: Well, that's a great moment to hold the tension a bit and first tell you more about our sponsor, Pilco.

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Speaker A: you are back in the Mergers and Acquisitions podcast with guest and former colleague Richard Oblath and we are discussing the recently announced Unilever McCormick deal. And we're just wondering if the deal creates value as it seems that the shareholders are not convinced about that.

Speaker B: Hus, I believe you've also done some homework on this deal. So back over to you.

Speaker A: Yeah. Let me share my views. I think of this deal as a merger of the Unilever food business with McCormick. And that's then followed by a split into a food company and a new non food Unilever. After the split, Unilever shareholders hold shares in both companies. That's 100% of Unilever, of course, and a very significant 55% in the food company. And um, McCormick shareholders now co own the larger food company, but they hold only 35% and the remaining 10%, 9.9 to be exact, of shares in the food company, they go to Unilever. So now let's look at where the value is transferred. The new Unilever ends uh, up with a 15.7 billion cash injection because that's the cash payment from McCormick. And it receives this remaining 9.9% share in the food company of which of course in the future that will become cash because the shares will be sold. Now you can argue that the food company will get the synergies. They are stated at $600 million per year. I typically take a net present value number for synergies at maybe a 6 to 7 multiple because they don't get delivered immediately. So that would be say $4 billion. And now we're going to look at the value of the Unilever food business. So we count all these things together. Unilever said the food business is $45 billion. The value of the McCormick business is $22 billion. So the new combined business will have a value of 45 plus 22 plus 4 from the synergies, minus the payment to Unilever of 15.7, which will become debt, which makes $54 billion for the uh, food company. So if you know that, you can calculate what the result is for both the Unilever, uh, shareholder and before and after the transaction, and you can do the same for the McCormick shareholder. And it follows that the Unilever shareholder value has increased by about $6 billion. And for the McCormick shareholders there would be a small decrease. So why, if that is the case, would Unilever shareholders like it less than the McCormick ones because they get this $6 billion uptick?

Speaker B: I think Hus, the answer is that not all parts of transactions are, uh, always hard financial views. I think some of the noise that we're hearing in the marketplace is not value Driven but emotional. We're talking about the breakup of a global, multi sector behemoth, especially from the UK shareholders. In the early 2000s, there was lots of noise when dual listing and the headquarters were being discussed. It was originally proposed that Rotterdam would become the headquarters and that the Amsterdam Euronext would be the primary listing location. But it was changed due to very, very noisy UK protests and the company finally decided on London as the headquarters and the FTSE as the place for the primary listing. The other issue I think that is weighing on the Unilever shareholders is the loss of iconic brands that they see in their kitchens every day. Liptons, Brook Bonds, hellmans, mayonnaise, knorr, etc. Many UK shareholders have been so for more than one generation. It's a heritage issue. And the leadership of the new firm is essentially McCormick's as well as its name. Hence the emotion that's tied up in this.

Speaker A: Yeah, I can understand that. And you can also argue that maybe they don't trust the McCormick management to do the same job as you and Levy did.

Speaker B: Yeah, I think that is, uh, a key, particularly around environmental practices and Paul Polman's very public leadership of Unilever in the 2010s.

Speaker A: I would also think that a lot of the shareholders are not quite happy with the structure of the deal. It may feel that there's a lot of risk left with them. Even if you don't want to, you become a shareholder in the newly merged food company and you are exposed to its success, including whether these synergies are going to be delivered. And also, and this may be even a bigger issue, you're not sure what the other shareholders are going to do. If they all want to sell like Terry Smith did already, there will be an overhang on the share price for a long time. It may feel to them, as Unilever has pushed this problem of divesting the food business back up to the shareholders. We couldn't sell it for cash, so now we give a share to you to sell it for yourself if you don't want it. And, um, by the way, we've given control of the operation to somebody else. And then there is the performance of the ice cream business since the ipo, which of course created a similar problem for the shareholders and they're just recovering after having traded below the issue price earlier in the year. But I do think it is still a good deal for Unilever in the long term. The value uplift is there. And another attractive side benefit of the structure chosen is that Pretty much all the historic liabilities of the business and remember you took them back to 1864 will have transferred to the new food company. And if you recall our uh, previous episode which focused on post deal liabilities, that's a good thing. So of course the deal's not done yet. What do you think the key risks are going forward?

Speaker B: Yeah, I think there are definitely risks and a lot of the issues that you've just raised are ah, kind of involved in those risks. I mean one is a revolt by the shareholders. Although interestingly you Unilever shareholder approval does not appear to be needed. Antitrust is always an issue. I think in this case more in the EU again perhaps for emotional reasons than in the us. The Trump administration I believe will be very supportive of a US firm leading a transaction like this. There's risk in delivering synergies within McCormick and I think more troublesome perhaps reducing the overhead within a much smaller Unilever. And then there's this complex setup in India, Nepal and Portugal. I am very well aware of problems where you're selling brands but not everywhere in the world. And there can be leakage from cross border sales and future disputes between McCormick and Unilever.

Speaker A: So if I summarize, there's a strong strategic logic for Unilever to focus on the non food business. But the last step of such a journey are always the most difficult. In this case the last bits of the food business. The CEO had Unilever already publicly committed and the deal team had a problem on their hands given the scarcity of buyers. McCormick was a good match but as it was smaller than the food business itself, it needed a very different deal structure to make this work. I think it's been quite a creative one but there's no way they could afford to pay. And while the deal should be accretive to the Unilever shareholders, so much of the risk has transferred to these shareholders and so much has changed of the old Unilever that in their perception it's not a good deal. And hence the shares have been trading some 5% below the price before the announcement. Now let's switch to some parallels with learnings that we took from Shell's divestment processes. Because Richard, you will remember we look back on them a number of years ago.

Speaker B: Yeah, let me start first with describing Shell's decision making. Business plans included always business as usual, organic investment and acquisitions. And that's very like most firms. But Shell also tested businesses resiliency going forward maybe a decade or further out using scenario planning where the business was tested under um, plausible alternative environments. If a business was not achieving its targets every year it was challenged to either fix itself or become a candidate to be sold. A divestment mandate, if they didn't fix themselves, was based on the hold value as a minimum. Actually a number of businesses were divested, all above the hold value in the early 2000s. In late 2010s a case study was undertaken for the larger divestments that we had undertaken. And the reason was that we noticed that many of the divestments, the companies that we divested benefited from new ownership. The question was why were they better parents than Shell? What were we doing wrong when we were trying to fix the business?

Speaker A: And an additional question was was it actually the wrong thing to be selling? Because obviously somebody else could be successful with it.

Speaker B: And I agree. And, and I think this study was fascinating. One is it focused on a few of the larger transactions. So we had a lot of data, a lot of people had been involved. And let me summarize the learnings. Fix or divest, which is kind of the theme that had run through the early 2000s was sometimes actually improved by a fix and then divest, which enhanced the proceeds the fix might include. And in fact in one very large case, making the business unit stand alone, carving it out already from Shell. And it then became easier to sell. Sometimes the decision to divest was also strategic as it didn't fit the go forward corporate path. And that's always a good rationale to sell because you become unloved by the parent and therefore the parent underinvests in

Speaker A: the future, which is probably also a dynamic that was playing with Unilever.

Speaker B: Yes, I believe that a new owner's short term gains though, and remember we looked at this in the late 2010, so we in most cases had about five to 10 years experience, actually ended with very poor longer term performance. In fact, in one case the transaction resulted in in some refinery sales in the refinery shutting. And Shell had predicted that those refineries in the long term were not competitive. And so although we got a short term gain in the company from selling and the new company got a short term gain in their early days of ownership, in the long run actually it was value destructive for them. This is really part of Shell's learning culture.

Speaker A: So I think there was also an effect on the remaining business in Shell because it actually enhanced the performance of Shell's downstream business.

Speaker B: I think that's true and I think this is to do with focus. The businesses that were remaining were loved by the company and therefore they could apply the cash that they were generating, some of which did not return immediately to Downstream. But when Downstream had a very compelling expansion case, the corporation could feed, uh, some of the cash back into the downstream. And it really did improve over those years.

Speaker A: So we did that as a bit of a, uh, one off, but we also had a more systematic review process. Can you explain also how that went?

Speaker B: Yeah. This was inherent as part of Shell's learning culture, which is part of its historical DNA. All transactions and major capital expenditures were subject to two mandatory tests versus the mandate before the divestment investment or capex spend. One was shortly after completion, just making sure that all the I's were dotted and T's crossed. But the second one, which I believe is more important, was about two years later. It was an independent look back by people within the company. It sometimes included people within the M and A community who were not in the transaction. So they were M and A experts, but they could look at what their colleagues had done. Um, this led to a very strong feedback loop for all of the M and A teams, enabling them to plan and look at future transactions. And thus continuously learning became deeply embedded, particularly within EBONY around the world.

Speaker A: So now we're sitting here and uh, sharing more learning with the listeners of the podcast. I think the MA world cannot get enough of that as deals are actually important for a well functioning business ecosystem with big decisions like Unilever, strategy direction, they need to be executed as well as they can. After all, in many cases businesses are better off with new owners and we'll see about their food business. But we have to learn that the less value we destroy in the process, the better it will be.

Speaker B: Hus, I fully agree and I've really enjoyed this interaction because it's not only allowed me to look at a current deal in an uh, area which I am not an expert in and nor you, but it also was a great reminder of the time we spent together within Shell doing M, M and A deals.

Speaker A: Well, I thank you for being on this podcast, Richard.

Speaker B: Thank you, Hus.

Speaker A: And that M marks the end of a slightly different podcast in which we've taken an actual deal to analyze and learn from, rather than delving into one specific aspect of MA with a guest who's an expert in that field. I would be interested to hear whether you enjoyed this slightly different format, in which case we might try that a bit more often. The best way to provide your feedback is, is if you give it to me via the LinkedIn post. In which this new episode is announced. Um, or you can also do it via the contact form on our sponsor's website. And that's pilco.com thank you for listening today.