Unilever is facing mounting investor backlash over its recent multibillion-pound tie-up with US food giant McCormick, with shareholders accusing the consumer goods behemoth of rushing the deal through without a vote and loading the new vehicle with too much debt.
Shareholder Concerns Over Governance
Shareholders in the FTSE-100 conglomerate told City AM that they were supportive overall of the group's major simplification drive, but that the megamerger it struck in March between its foods division and McCormick "felt rushed" and should have been put to investors in a vote. Unilever took investors off-guard when it announced it had agreed a $45bn (£33bn) deal to combine its food arm, which boasts staples like Marmite and Knorr, with US flavourings juggernaut McCormick to create one of the largest standalone food groups in the world.
The deal was part of a wider drive from the Anglo-Dutch consumer group to focus on the high-growth elements of its portfolio, personal care and beauty and wellbeing. The firm had already chosen to spin its ice cream business off as a separate company in December as part of the same simplification drive, which is being championed by activist investor and Unilever board member Nelson Peltz. But the terms of its deal with McCormick, which owns brands like French's mustard and Schwartz seasonings, has attracted the ire of investors, who question the fast-moving consumer goods (FMCG) firm's decision to use the recent listings overhaul to bypass a shareholder vote.
"Having the ability to vote removed is questionable corporate governance," Jack Martin, portfolio manager at Oberon and Unilever investor, told City AM. "It's not great if you're a big fund and you own five per cent of the company, you're the owner, you should have a say – that's not ideal."
The tie-up was the largest in the histories of both companies and, under the terms announced, gives Unilever shareholders control of 65 percent of the new entity. One Unilever top 20 shareholder, speaking on the condition of anonymity, told City AM that they risked being "stuck" in a low-growth sector, and would dump their holding in the new entity when it was launched.
A spokesman for Unilever said: "Under the UK rules, it was the board's responsibility to approve the transaction and conclude that it is in the best interests of the company and its shareholders. The transaction received unanimous support from the board. We value open dialogue with our shareholders and will continue our engagement to explain the benefits of this transaction."
New Entity to Hit by a Wave of Unilever Shareholder Sales
Meanwhile Will Knott, a portfolio manager and Unilever shareholder at Ninety One, warned the new entity risked being hit by a wave of forced sellers as funds whose focus is on UK or European companies were forced to exit their holding. "Unilever has a majority UK European investor base, a lot of whose mandates – including mandates we have here at Ninety One, are UK or European equity funds and so they shouldn't really be holding shares in a US based us food company," he said. "There was always going to be a question over that."
Oberon's Martin added that he planned to sell his fund's holding in the new entity, then reinvest the returns back into Unilever's core business. "With transactions of this nature you get a wave of indiscriminate sellers, who get shares in the new company and don't want to own them," he said, adding: "We don't own Unilever for the food division. That is going to be the playbook for a variety of investors."
A Unilever spokesman said: "This transaction accelerates Unilever's strategy and creates two stronger companies, each with an improved growth profile. It originated from an inbound proposal from McCormick, creating an opportunity to deliver a growth-led separation of Foods at an attractive valuation. We are confident it will unlock significant value for our shareholders." The spokesman added that McCormick will pursue a secondary listing in Europe. Analysts have identified London and Amsterdam, where Unilever's spun-off ice cream division was listed last year, as the two most likely destinations.
Unilever shares fell by more than seven per cent on the day, extending a run of declines this year that has seen its stock price fall over 11 per cent. McCormick's fell as much as 10 per cent in the US, with investors balking at the amount of debt being loaded onto the new entity as part of the transaction. Unilever currently operates with a net debt to earnings ratio of about two times earnings before interest, taxation, depreciation and amortisation (EBITDA). The new entity will be launched onto the market with a net debt to EBITDA ratio of nearly four to one, as McCormick was forced to borrow $15bn in a bridging loan to help fund the tie-up.
Knott, who is also supportive of Unilever's simplification drive overall, said the debt being loaded onto the new vehicle was "right on the cusp of being uncomfortable." "From our perspective as kind of quality minded investors, it is right at the threshold of what we would deem as an appropriate level of leverage for an asset like that," he added. The remarks add to growing unrest among the Unilever investor base, with analysts at RBC Capital markets saying after the announcement they weren't "overly impressed by what they see."
