Unilever has entered into an agreement to sell its global tea unit, excluding its tea business in Asia and Lipton JV with PepsiCo, to CVC Capital Partners Fund VIII for €4.5bn on a cash-free, debt-free basis. The new business, which will be called ekaterra, boasts a portfolio of 34 brands including Lipton, PG Tips, Pukka, T2 and TAZO. It generated revenues of around €2bn in 2020.
The valuation represents 2.4 times sales and 14.5 times EBITDA, coming in above market expectations which largely thought the price would land in the region of 11-12 times EBITDA.
An ‘important step’ in portfolio realignment?
Commenting on the deal, Unilever CEO Alan Jope placed it in the context of Unilever’s portfolio evolution towards higher growth brands and categories.
“The evolution of our portfolio into higher growth spaces is an important part of our growth strategy for Unilever. Our decision to sell ekaterra demonstrates further progress in delivering against our plans,” he claimed.
For some time now – since before the 2018 disposal of its spreads business – Unilever management has been talking about the need to weight its portfolio towards higher growth brands and categories. The company wants to move away from more mature, consolidated and structurally slower growth businesses, instead focusing on areas that technology, R&D and marketing can deliver differentiation.
In the overall context of Unilever’s business – which spans food, refreshments, personal care and homecare – long-running market chatter has concentrated on the possibility of a full-scale exit of food and refreshments to concentrate on beauty and homecare.
Indeed, for many years a structural shift in Unilever’s sales mix has edged the company in this direction. In 2004, 56% of sales were generated in food and refreshments. Now, it is more like 40%. The company has sold off food brands and picked up home and personal care interests. And some business observers are hungry for more of the same.
Commenting on the tea sale, Jeffries analyst Martin Deboo observed: “It's been a long time coming, but an important first step on Unilever's portfolio rationalisation journey has been taken.”
Does ‘first step’ suggest we could see further F&R disposals on the horizon? According to Deboo, Jeffries takes the view that a dream scenario would be a split food that would - somehow - then see Unilever’s home and personal care business combined with Colegate.
“The rump foods business resides in low-growth, centre-store categories,” Deboo observed. Alongside tea can be counted bouillon, mayo and condiments, he suggested. “We struggle to see how Unilever can invest and/or innovate its way to growth in F&R, let alone get investor support for it.”
However, a wholesale exit from food and refreshments is unattractive because it would be ‘heavily dilutive’. “It would only make sense in our view as an enabler of step-change expanding into home and personal care, where we continue to fantasise around an ultimate Unilever-Colegate combo.”
If Unilever is to continue its lumbering journey away from low-growth, centre-store categories, perhaps a more likely scenario would be the sale of its mayo and dressings assets, which include brands like Hellmann’s. This would be only ‘modestly dilutive’ and get Unilever out of ‘tricky categories’ without overly damaging its reach in emerging markets, according to Deboo.
Certainly, for all intents and purposes, Unilever has signalled its ongoing commitment to areas of the food portfolio that it believes can deliver superior growth. Earlier this year, the group said it will lean in on investment in this space.
“Our strategy here is quite clear. We will continue to evolve our portfolio towards higher growth segments in home care, beauty, personal care and foods, both the choices we make for organic investment and in the acquisitions and disposals that we pursue,” Jope revealed.
“The places where we choose to deploy our capital will be guided by these clear investment criteria. Are the spaces we're focusing on a sufficient size? Are they intrinsically higher growth? Do they have strong potential in the growth markets of the future? Can we see a route to market leadership? And finally, are they in product categories that are sensitive to Unilever's marketing and technology know-how?”
As the company applies this criteria to its portfolio, two of the categories that ‘really start to emerge’ – and where we should expect ‘the lion’s share of our capital deployment in the years ahead’ – were identified as plant-based foods and functional nutrition. The company has targeted plant-based sales of €1bn by 2027 and indicated that this investment would come in the form of spending behind its existing brands and M&A.
The future for ekaterra
If the rest of Unilever’s food and refreshment portfolio looks like it can expect stable ownership for the time being at least, what of the future for the tea business?
Jope said he expects ekaterra’s ‘strong brands’ and ‘global reach’ to ‘prosper’ under the new ownership structure.
Likewise, new owner CVC said it anticipates accelerating future growth. “ekaterra is a great business, built on strong foundations of leading brands and a purpose-driven approach to its products, people and communities. ekaterra is well positioned in an attractive market to accelerate its future growth, and to lead the category’s sustainable development. We look forward to working with the team to realise ekaterra’s full potential,” said Pev Hooper, a Managing Partner at CVC Capital Partners.
But not everyone is convinced. Venture capital’s long shadow of cost cutting and asset stripping means the deal has received a cool reception in some quarters.
Unite, the union, described the sale as ‘another case of corporate betrayal’ as it called for ‘urgent talks’ with Unliever and played up CVC’s link to the collapse of UK high street retailer Debenhams.
“The story of private equity buy-outs in the UK very often has a fatal pattern of debt loading, asset stripping and job cuts as short-term shareholder dividends soar,” Unite general secretary Sharon Graham warned.
"The sorry consequences of CVC’s so-called ‘investment’ in Debenhams, which crashed last December, are there for all to see with hundreds of shops shut and thousands of jobs gone.
"We are determined that the new business has a secure future in the UK and is not further broken up for a quick profit.”