Unilever After Magnum: Demerger, Foods Exit and Valuation
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About ten months ago, Unilever gave its shareholders the world's largest ice cream company, a business with €7.9 billion of sales. Unilever has since agreed to hand most of its food arm, another €10.7 billion of sales, to McCormick. Once both deals close, the company that made Knorr stock cubes, Hellmann's mayonnaise and Magnum bars will get about 97% of its sales from soap, shampoo, deodorant, laundry and skincare.
Watch it play outUnilever is shrinking itself into a home and personal care pure play
Until late last year, Unilever also owned the world's largest ice cream company.
It was handed to shareholders as The Magnum Ice Cream Company, a business with €7.9 billion of sales.
What remained sold €50.5 billion last year. Inside it sits Foods: Knorr, Hellmann's and more.
Foods, another €10.7 billion of sales, goes to McCormick. About €39 billion is left.
Once both deals close, about 97% of sales will come from soap, shampoo, deodorant, laundry and skincare.
Source: Unilever results and McCormick deal presentation; Magnum Ice Cream Company results
Shareholders didn't have to do anything to get the ice cream shares. Anyone holding Unilever stock on the record date received one Magnum Ice Cream Company share for every five Unilever shares, credited automatically. The next day Unilever consolidated its own stock, swapping eight new shares for every nine old ones, so its share price and dividends per share stayed comparable.
Watch it play outA 100-share Unilever holder ended up with two stocks
Start with 100 Unilever shares on the record date.
Every five Unilever shares earned one new share, credited automatically: 20 Magnum Ice Cream shares.
The next day Unilever swapped 8 new shares for every 9 old ones.
So 100 became about 89, with the share price and dividends per share kept comparable.
Source: AJ Bell; interactive investor
The new stock had a rough start. Magnum, listed in Amsterdam with secondary lines in London and New York, opened at €12.20 and closed its first day around €12.90, valuing it at about €7.9 billion. Index funds had to sell because it wasn't joining the FTSE 100. It has since traded as low as €11.02 and as high as €17.68, and now sits at €15.21.
Watch it play outMagnum sank, then climbed well above its first close
Magnum closed its first day around €12.90, valuing it at about €7.9 billion.
Index funds had to sell because it wasn't joining the FTSE 100. It has traded as low as €11.02.
And as high as €17.68.
It now sits at €15.21, comfortably above that first close.
Source: interactive investor; StockAnalysis
Meanwhile Unilever changed its chief executive, pushed sales toward a shortlist of big brands, and posted its best volume quarter in more than a decade.
This piece walks through how the demerger worked, how Magnum has done on its own, why the board pushed out Hein Schumacher, what the McCormick deal leaves behind, and how Unilever is valued next to Nestlé, Procter & Gamble, Reckitt and Haleon. It ends with a view on both stocks.
How did the Magnum Ice Cream demerger work?
A demerger is a spin-off: the parent hands shares in a division straight to its own shareholders instead of selling it. No cash changes hands. You simply end up owning two companies instead of one.
The Magnum Ice Cream Company, or TMICC, is incorporated in the Netherlands and headquartered in Amsterdam, which is its primary listing. It also trades in London and on the New York Stock Exchange, all under the ticker MICC. Picking Amsterdam over London for the main listing fits a wider drift of companies away from the London market. Unilever kept 19.9% of the shares and, according to Reuters via Yahoo Finance, intends to sell out within five years. Unilever's own full-year results say the stake will be "sold down in an orderly and considered manner."
Two things weighed on day one. First, interactive investor noted that Magnum wouldn't be part of the FTSE index series. The FTSE 100 is the index of London's 100 biggest listed companies, and funds that track it held Magnum only because they held Unilever. UBS expected about $580 million of forced selling. Second, the market simply valued ice cream lower than Barclays had hoped: its analysts had pencilled in an equity value of €10.1 billion to €10.8 billion and a share price above €20.
The reference price set before listing valued TMICC at about 8 times expected adjusted EBITDA (earnings before interest, tax, depreciation and amortization, a rough proxy for operating cash). Degroof Petercam called that a 41% discount to food peers such as Nestlé, Hershey and Mondelez.
Four years from activist arrival to a pure home and personal care company
4 yrs ago£50bn bid for GSK consumer arm rejectedTrian takes a 1.5% stake; Peltz joins the board
3 yrs agoHein Schumacher becomes CEOBacked by Peltz
Last yrSchumacher out, Fernandez inBoard wanted faster execution
Last yrMagnum Ice Cream demergedListed in Amsterdam, London and New York
This yrFoods deal with McCormickDue to close by the middle of next year
Event order as reported by Unilever, Reuters and Food Dive.
How has Magnum Ice Cream done since the split?
The first report card disappointed. TMICC's full-year results showed organic sales growth of 4.2% last year, made of 1.5% volume and 2.6% price. Organic growth strips out currency moves and acquisitions. But fourth-quarter sales fell 0.7% organically, the adjusted EBITDA margin dropped from 16.9% to 15.9%, and free cash flow, the cash left after running costs and investment, collapsed to €38 million from €803 million because of €564 million of demerger-related outflows. The shares drifted lower for weeks.
The first half of this year was better. According to TMICC's half-year results, organic growth was 4.7%, split 2.5% volume and 2.2% price. Adjusted EBIT margin rose 50 basis points to 15.3% (a basis point is a hundredth of a percentage point). Free cash flow reached €273 million, helped by a €173 million working-capital swing tied to its interim arrangements with Unilever.
Asia, the Middle East and Africa did the heavy lifting for Magnum
AMEA7.6%
Europe & ANZ4.1%
Americas3.2%
Group4.7%
Organic sales growth by region in the first half of this year. AMEA is Asia, Middle East and Africa; ANZ is Australia and New Zealand.
Source: Magnum Ice Cream Company half-year results
The company has a lot going for it on paper. It says it holds about 21% of the €75 billion global ice cream market, owns four of the world's five biggest ice cream brands (Magnum, Ben & Jerry's, Cornetto and the Heart-brand) and runs around 3 million freezer cabinets. Its capital markets day targets call for 3% to 5% organic growth a year, 40 to 60 basis points of annual EBITDA margin gains, and €0.8 billion to €1.0 billion of free cash flow in two and three years' time. It plans to pay out 40% to 60% of adjusted net income as dividends, starting next year.
The weak spots are just as clear. Net debt was €3.26 billion at the half-year, and the company is paying Unilever for back-office services until its transitional agreements end, by the end of next year. Then there's Ben & Jerry's. The brand's independent board has been suing its owners for two years over its social mission, and co-founder Jerry Greenfield quit in protest. This year the Ben & Jerry's Foundation joined the lawsuit, Reuters reported, and it later said it would shut down after Magnum cut its funding.
Insiders bought on the dip. A US filing shows the finance chief buying 20,000 shares at about €13.41 after the first results.
Why did Unilever replace Hein Schumacher with Fernando Fernandez?
Schumacher took over three years ago with strong support from the activist investor Nelson Peltz, who knew him from the board of H.J. Heinz. He launched the Growth Action Plan, which focused spending on the biggest brands, announced the ice cream separation and started an €800 million savings program that cut about 7,500 mostly office jobs.
Then, last year, the board removed him after about 20 months. The board update called it a mutual agreement, but chair Ian Meakins said there was "much further to go to deliver best-in-class results." He praised Fernando Fernandez, the finance chief, for his "ability to drive change at speed." Fernandez joined Unilever nearly four decades ago and previously ran Beauty & Wellbeing, its fastest-growing unit. Bloomberg reported the vote was unanimous, which means Peltz voted to remove the man he had backed.
Under Fernandez, the pace did pick up. The demerger completed on schedule, the food deal followed within months, and quarterly volume growth accelerated.
What did Nelson Peltz and Trian change?
Trian, Peltz's fund, built a stake of about 1.5% four years ago, and Peltz joined the board that summer, according to Unilever's announcement. It came just after Unilever's £50 billion bid for GSK's consumer health arm, now Haleon, was rejected.
Trian is known for pushing big consumer companies to simplify. It drove the split of Cadbury Schweppes and spent four years on Procter & Gamble's board. Food Dive noted analysts expected the same playbook at Unilever, and that is roughly what happened: fewer, bigger brands, the exit from ice cream and food, and leaner overheads. Trian sold part of its holding two years ago, The Grocer reported, about £181 million of shares. Peltz was still on the board last year, when Unilever named him to its compensation committee.
What does "fewer, bigger brands" mean at Unilever?
Unilever calls its biggest brands Power Brands, and the idea is simple: put the money behind fewer, bigger names. Two years ago there were 30, making up more than 75% of sales. After the food exit, the McCormick deal presentation counts 25, about 78% of the new company's turnover.
Power Brands make up 78% of Unilever's sales and grow faster
78%Power Brands
22%Everything else
Share of turnover. In the first half of this year, Power Brands grew underlying sales 6.0%, with 5.4% from volume, against 4.8% for the group.Source: Unilever half-year results
The rest is being pruned. Unilever sold Conimex, The Vegetarian Butcher and Kate Somerville last year. This year it has sold Graze, Indonesian tea brand SariWangi, home care businesses in Central America and the Caribbean, and its Ivory Coast subsidiary, with Colombia and Ecuador home care pending. It is also buying in growth: 80% of the gummy supplement brand Grüns for €767 million. Prestige beauty brands such as Hourglass, Tatcha and Paula's Choice grew strongly.
Geography matters too. Emerging markets are 60% of turnover and grew 7.0% in the first half, led by India and Indonesia. Developed markets grew only 1.5%, with Europe shrinking 0.9%.
Is Unilever growing through volume or price?
This is the question that matters most for a consumer goods company. Underlying sales growth (USG) is Unilever's organic growth measure, and it splits into volume (selling more units) and price (charging more per unit, including mix). Price-led growth can't last: eventually shoppers trade down. Volume-led growth is the healthy kind.
Unilever went from all price to mostly volume
VolumePrice
−2.52.55.07.510.012.5%0
−2.1%11.3%
4 yrs agoVolume−2.1%Price11.3%
0.2%6.8%
3 yrs agoVolume0.2%Price6.8%
2.9%1.3%
2 yrs agoVolume2.9%Price1.3%
1.5%2.0%
Last yrVolume1.5%Price2.0%
4.2%0.6%
1st halfVolume4.2%Price0.6%
4 yrs ago3 yrs ago2 yrs agoLast yr1st half
Contributions to underlying sales growth. The first three years include ice cream; last year and the first half of this year don't.Source: Unilever annual and half-year results
Four years ago, Unilever's sales grew 9.0%, but all of it came from price, up 11.3%, while volumes fell 2.1%. That was inflation, not strength. The latest half-year results show the reverse: USG of 4.8%, with 4.2% volume and only 0.6% price. In the second quarter, volume grew 5.5%, which Fernandez called "the best volume quarter at Unilever in over a decade."
There's a catch, though. Price grew just 0.2% in that quarter. Management blamed three temporary factors: tough comparisons in Personal Care, planned World Cup promotions, and price cuts in Brazilian home care to win back share. Volume bought with discounts is less valuable than volume won by better products. Unilever expects the second half to be driven by pricing, which will test whether the volume holds.
Find the weak link
Tap the phrase you think is the tell.
Spotted it.Not that phrase. Price growth of 0.2% is the line to watch. Management expects pricing to drive the second half, so volume needs to hold up when promotions fade.
“Volume growth of 4.2%” The headline strength, and broad-based across divisions.
“Emerging markets up 7.0%” Real and long-running, led by India and Indonesia.
“Second-quarter price growth of just 0.2%” Promotions and Brazil price cuts helped buy that volume. If prices rise and volume fades, the story weakens.
“Free cash flow of €1.5 billion” Up from €1.1 billion a year earlier. Not a worry.
By division, Home Care led with 7.6% growth, Beauty & Wellbeing grew 5.9% and Personal Care 4.8%. Foods, the part leaving, managed just 1.2%.
The food arm Unilever is selling is its slowest grower
Home Care7.6%
Beauty & Wellbeing5.9%
Personal Care4.8%
Foods1.2%
Underlying sales growth by division, first half of this year.
Source: Unilever half-year results
What does the McCormick deal do to Unilever?
McCormick, the US spice maker, is combining with Unilever Foods in a deal with an implied enterprise value of $44.8 billion. Enterprise value is the price of a whole business including its debt. The structure is a Reverse Morris Trust, a US tax-efficient way to spin off a division and merge it with another company in one step.
Unilever shareholders end up owning most of the new McCormick
Unilever Foods (Knorr, Hellmann's; €10.7bn of sales) to $15.7bn cash (Paid to Unilever, borrowed by McCormick)
Unilever Foods (Knorr, Hellmann's; €10.7bn of sales) to 55.1% of new McCormick (To Unilever shareholders)
Unilever Foods (Knorr, Hellmann's; €10.7bn of sales) to 9.9% stake (Kept by Unilever, to be sold over time)
McCormick's existing shareholders keep 35%. India Foods stays with Unilever. Closing is expected by the middle of next year.
The price is decent. The deal values Foods at 13.8 times EBITDA, which Unilever described as in line with its own rating and above listed food peers. Foods had €2.6 billion of underlying operating profit last year, a 24% margin, but grew only 2.7%, with 1% volume.
That's the trade-off. Unilever is giving up its highest-margin division to become faster-growing. The new company's pro forma operating margin is above 19%, slightly lower than today's 20.0%, but gross margin rises above 48% and brand spending above 18% of sales.
The new Unilever trades margin for growth
Unilever today
New Unilever
Sales
€50.5bn
About €39bn
Operating margin
20.0%
Above 19%
Gross margin
46.9%
Above 48%
Home & personal care
Includes Foods
About 97%
Emerging markets
60%
62%
Growth target
4% to 6%
Mid-single digit
Source: Unilever results and McCormick deal presentation
The new medium-term targets are mid-single-digit sales growth, at least 2% volume, gross margin expansion, modest operating margin gains, a dividend payout above 50%, and shareholder returns in the top third of home and personal care peers.
How do Unilever's margins, cash and buybacks look?
Unilever's underlying operating margin was 20.0% last year, up from a restated 19.4% without ice cream, and 20.3% in the first half. Its savings program finished ahead of plan, funding brand spending.
Cash generation is solid. Free cash flow was €5.9 billion last year. Unilever spent €1.5 billion buying back stock last year and another €1.5 billion this year, retiring 30.7 million shares, which added 0.7% to earnings per share. Net debt rose to €26.0 billion, 2.3 times underlying EBITDA, after dividends and the buyback. The plan is to bring it back to about 2 times.
Food cash funds €6 billion of buybacks over four years
Cash from McCormick$15.7bn before tax and separation costs$15.7bn
Keep leverage near 2xNet debt is 2.3x EBITDA now~2x
Share buybacksFrom this year through three years from now€6bn
Plus a dividend payout above 50%
Read more on how repurchases help, and when they don't, in our chapter on dilution and buybacks.
Is Unilever cheap next to Nestlé, P&G, Reckitt and Haleon?
The most useful yardstick is the forward price-to-earnings ratio, the share price divided by expected earnings per share over the next year. At 4,623p a share, Unilever trades at 16.3 times forward earnings, according to StockAnalysis, with a dividend yield of 3.7%.
Unilever trades at a 23% discount to P&G
P&G21.2x
Unilever16.3x
Nestlé16.1x
Haleon15.2x
Magnum Ice Cream15.1x
Reckitt14.7x
Forward price-to-earnings ratio at the latest close.
Source: StockAnalysis
P&G sits at 21.2 times. Nestlé is at 16.1, Haleon at 15.2 and Reckitt at 14.7. On enterprise value to EBITDA, Unilever's 12.5 times compares with 14.9 for P&G, 13.9 for Nestlé, 12.7 for Haleon and 11.5 for Reckitt.
So Unilever already trades a little above the European pack and well below P&G. The market pays up for P&G's consistency. Unilever's case for closing part of that gap rests on three things: it is becoming a cleaner home and personal care company, its volumes are now growing faster than prices, and 62% of the new company's sales come from faster-growing emerging markets. The case against is its record: last year the board itself said there was "much further to go," and the latest volume surge leaned partly on promotions.
A re-rating toward P&G is worth far more than a few points of earnings
Pick the forward multiple the market pays and how earnings come in against forecasts
−14.5%−10.0%−5.5%−5.0%0.0%+5.0%+4.7%+10.2%+15.7%+13.4%+19.3%+25.3%+23.1%+29.6%+36.1%below Current pricebelow Current pricebelow Current pricebelow Current pricein line with Current priceabove Current priceabove Current priceabove Current priceabove Current priceabove Current priceabove Current priceabove Current priceabove Current priceabove Current priceabove Current price
Current price4,623p
3,951p6,292p
Yield Theory arithmetic: current price × (chosen P/E ÷ 16.3) × earnings change. Not a forecast.Source: StockAnalysis; Yield Theory calculations
Is Magnum Ice Cream a buy?
At €15.21, TMICC's market value is €9.31 billion and its enterprise value €12.62 billion, according to StockAnalysis. That's 10.5 times trailing EBITDA and 15.1 times forward earnings, both below Unilever. Analysts' average target is €16.78.
Make a guess
Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 10.7%.
About 10.7%, or 8.6% at the bottom of the €0.8 billion to €1.0 billion range. That's the bull case in one number. Last year's free cash flow was just €38 million, so it has to be earned.
Source: Magnum Ice Cream Company targets; StockAnalysis; Yield Theory calculations
That is the bull case: a market leader with global brands, priced like a mid-tier food company, with a cash flow target that would make the stock look cheap if met. Margins should rise as the costly service agreements with Unilever end.
The bear case is about risk, not price. Ice cream depends on summer weather and on cocoa and dairy costs. Weight-loss drugs (GLP-1s) could shrink indulgent snacking over time. Unilever's 19.85% stake, worth €1.85 billion at the half-year, is an overhang it plans to sell. And the Ben & Jerry's fight is a brand risk that won't stay in court.
Check the claimThree things people say about the two stocks, tested
What could go wrong?
For Unilever: the McCormick deal needs McCormick shareholder and regulatory approval and won't close before the middle of next year. The new company starts with €400 million to €500 million of stranded costs, overheads left behind by Foods, which it plans to offset. Europe is shrinking, and currency moves cut 4.9% from reported turnover in the first half. For TMICC: net debt, weather, input costs and the Ben & Jerry's dispute. Both firms report in euros, so UK and US investors take currency risk on top.
Our read
The slimmer Unilever deserves a modestly higher multiple, not P&G's. Volume-led growth, a 78% Power Brand mix and a 62% emerging-market weighting make it a better business than the one Peltz walked into. But one strong quarter doesn't make a track record. We think 18 times forward earnings, around 5,100p in our scenario, is a fair target if volume holds above 2% through the price increases expected in the second half.
The food sale is good business. Getting 13.8 times EBITDA for a 1%-volume food arm, partly in cash, is a fair exit, and the €6 billion buyback plan gives a floor to per-share growth while the deal closes.
Magnum Ice Cream is the better value of the two and the riskier one. At about 10.5 times EBITDA, the market is pricing in little of its free cash flow target. We'd call it a buy for patient investors who size it small, roughly half a normal position, and add once the transitional agreements wind down and free cash flow moves toward €0.8 billion.
What would change our mind: Unilever volume slipping below 2% when prices rise, or Magnum missing its 3% to 5% growth range two years running.
Go deeper
Dilution and buybacks: judge whether Unilever's €6 billion of buybacks create value at 16 times earnings.
Unilever spun off €7.9 billion of ice cream and is handing €10.7 billion of food to McCormick. What the slimmer company earns, how Magnum Ice Cream has traded, and whether either stock deserves a higher price.
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The thesis, the numbers behind it, and what would break it. Full access is $39 a month.
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