Unilever swaps African spreads business for subsidiary stake

Unilever indicated in April that it intended to sell its global spreads brands in a move to “transform”​ the business and increase returns to shareholders.

The group has apparently received a flurry of interest in the international unit, with private equity firms Blackstone and CVC Capital Partners reportedly tabling a joint bid amongst other interest from another consortium, Clayton Dubilier & Rice and Bain Capital.

The company’s decision to sell its business in South Africa to Remgro means the South African-based investment firm takes full control and ownership of leading brands including Rama, Stork, Flora and Rondo in the market.

Remgro also owns a majority stake in RCL Foods, an African food producer operating across South Africa, Swaziland, Namibia, Botswana, Uganda and Zambia. RCL manufactures a wide range of branded and private label food products.

Under the terms of the agreement, Remgro paid Unilever an additional cash sum of €310m (ZAR4.9bn). This plus the 25.75% stake in the Anglo-Dutch group's unit in South Africa, valued the spreads business at €443m (ZAR7 bn).

‘Accelerating growth’​​

“Unilever South Africa is a great business, well positioned for sustainable long-term growth,”​ said Luc-Olivier Marquet, executive vice president of Unilever.

“By giving us full ownership of the business, this transaction means we are better placed to accelerate that growth while the spreads business moves on to Remgro where it augments their current portfolio and can be sure of a great future.”​

Jannie Durand, CEO of Remgro, said: “Through this transaction, Remgro has exchanged its minority stake in Unilever South Africa for full ownership and control of the Unilever spreads business in South Africa, Botswana, Lesotho, Namibia and Swaziland... ​“We believe the Unilever spreads business in these Southern Africa countries is an attractive business, with leading brands with good growth prospects.”​

According to investment firm, MainFirst Bank, South Africa represents around 2% of Unilever’s total revenues, of which 15% is generated from its Rama, Stork, Flora and Rondo brands, resulting in approximately €160m, or 0.3% of total revenues.

From a margin perspective, in Europe and North America, around 70% of Unilever’s total spreads business, the company achieves margins above its underlying operating margin at a group level of 16.4%

“Unilever aims to look for potential buyers of its total spreads business (around €3bn revenues) this autumn and expects an ongoing disposal of the business in the remaining months of FY-17,”​ said Alain-Sebastian Oberhuber, partner in equity research consumer goods at Mainfirst.

The company’s spreads related product assortment includes standard as well as cooking/baking margarine across over 30 different brands.

Euromonitor believes these global brands are facing a challenging time with absolute global sales in the spreads category declining by more than -2%, on average during the last four years. However, the market research provider found spreads registered a current retail value growth of 12% to reach €133m (ZAR2.1bn) in the South African market in 2016.

In addition, flavour innovations appear to provide a boost to spreads performance with nut and seed based spreads the best performer with 14% current retail value growth.

“The performance of spreads hinges both on the performance of bread as well as innovation and competitive pricing within spreads,” ​added Euromonitor food analysts. 

“Manufacturers need to ensure that they stimulate consumer interest in spreads or many consumers will drop out. ​

“It is difficult for players to launch completely new brands, with such launches requiring considerable expense and possibly seeing only a limited consumer uptake. However, there is room for brand extensions within spreads.​

“Volume growth is expected to be driven by manufacturers offering price promotions and discounts. An expected strong performance for packaged bread is also expected to contribute to growth within spreads.”​

Bolt-on acquisitions targeting millennials​

In a roundtable event, hosted in London last week, Unilever’s CFO, Graeme Pitkethly confirmed bolt-on acquisitions would continue to form the bulk of Unilever’s strategy with larger acquisitions becoming less important.

He said that large acquisitions were much riskier as channel changes with consumers were significant and challenging to evaluate.

Furthermore, Pitkethly added that there would be more acquisitions in the emerging markets -- in particular in the frontier markets -- in the future, despite high valuation multiples and the fact that Unilever was exposed to currency risk.

“In our opinion, the M&A theme has changed in the FMCG market and the activity will focus more on targets that interrupt the market and better anticipate the trends of millennials,” ​MainFirst's Oberhuber observed.