Unilever wisely spins off Ben & Jerry’s and Magnum

(Bloomberg Opinion) — Unilever Co. is trimming the fat on all fronts. Chief Executive Hein Schumacher plans to spin off its ice cream business, which includes the Magnum and Ben & Jerry’s brands, to focus on high-growth categories such as high-end beauty.

This is the right thing to do. But Schumacher, who has been at the helm since July, shouldn’t end the restructuring there, nor can he afford any missteps in the consumer giant’s underlying performance.

Schumacher has quietly begun streamlining his portfolio after impressing investors with his strategic vision last October. In December, he sold a range of brands, including Q-Tips and Timotei shampoo, for an undisclosed amount.

On Tuesday, Schumacher said the company would spin off its ice cream unit, which had sales of 7.9 billion euros ($8.5 billion) last year. While the division has some strong brands, it has struggled as the pandemic has disrupted restaurant visits and holidays and been hampered by unpredictable weather. Last year, sales in that business grew 2.3%, while sales in the beauty, wellness and personal care business grew more than 8%.

The deal would also free Unilever from the influence of Ben & Jerry’s, which has become a headache in recent years because of its semi-independence from its parent company.

Unilever said a spin-off was the most likely path to a separation. But by announcing the spinoff, the company has effectively put the unit up for sale. Private equity firms are already involved in this space, so it is a natural buyer. Rival Nestlé’s ice cream business is owned by a joint venture with PAI Partners.

Unilever’s ice cream business will take a sizable share, though. They are expected to generate underlying operating profit of 929.9 million euros this year, which could mean earnings before interest, taxes, depreciation and amortization of around 1.4 billion euros, according to Bloomberg analyst consensus estimates. If calculated at a peer P/E ratio of 12 times, this would imply an enterprise value of approximately €17 billion.

One of the problems with spinning off Unilever’s food business is the additional costs incurred due to the loss of economies of scale. But Schumacher is addressing the problem with a plan to save 800 million euros by cutting 7,500 jobs over the next three years. This should help address the so-called stranded cost problem.

But Schumacher shouldn’t just eat ice cream. Unilever still owns some food brands, including Hellmann’s mayonnaise and Knorr soup cubes, that look increasingly at odds with its focus on beauty and personal care. Home care is also growing slowly, while even certain parts of the personal care sector, such as toothpaste, could benefit from pruning. Some recent acquisitions, such as Smartypants vitamins and Murad skin care products, also underperformed.

What’s more, once the separation is complete, the CEO raised his medium-term sales growth target from 3% to 5% and even into the mid-single digits. Granted, ice cream is growing at a slower pace, so eliminating that segment will automatically boost revenue expansion. At the same time, cost-saving plans should help simplify how Unilever operates. He also pledged to modestly improve profit margins.

But increased coaching could make Schumacher a hostage to wealth. Previous targets were broadly in line with peers and gave him room to outperform. That wiggle room is now gone.

After under-promising the product portfolio in October, Schumacher has over-delivered. Now he must do the same, juggling not only Unilever’s businesses but also actual sales of Dove tanning products and Hourglass lipstick.

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

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