Why is Unilever selling its ice cream business?

It’s the world’s largest ice cream business, with power brands such as Magnum, Ben & Jerry’s and Wall’s driving annual sales of €7.9bn (£6.8bn). But Unilever has put it up for sale, announcing in March to exit by the end of 2025. Why?

How much is the business worth?

But the success of the divestment also depends on the cash Unilever can raise from it. It’s been valued at £15bn. Who would want to pay that for a low-growth business, with high fixed costs – and one also on the wrong end of key consumer trends in terms of health, UPFs and the effects of fat-loss drugs on diets?

On the contrary; the appeal is strong, says Akeel Sachak, global head of consumer at Rothschild. “From a category and market position point of view, ice cream should be an attractive prospect whether as a buyout or an IPO or a demerger. It’s the global leader in this category and it’s a high margin category, with pretty robust and dependable growth.”

And while Unilever has said a spinoff into a separately listed business is “the most likely separation route”, Unilever is also reported to have opened talks with from some of the world’s biggest private equity firms, including Advent International, Blackstone, Cinven and CVC Capital Partners, while Clayton Dubilier & Rice and KKR have also shown an interest.

“This ice cream sale is not about the ice cream business at all. It’s the best ice cream business in the world”

Hein Schumacher, Unilever CEO

One dealmaker says private equity interest in the business is no surprise. “There was always a mantra that if you buy from Unilever, you are getting a well-invested but under-managed business, so the ability to drive out costs and make money are very large. However, the scale of business means no single firm can contemplate taking it on alone, so it would have to be a consortium or partnership with Unilever.”

Jefferies analyst David Hayes suggests tax could also be a key factor: “A spinoff to existing shareholders will still incur some tax leakage, but we think this is the route that could minimise such tax considerations.”

However, he suggests the £15bn price tag touted in media reports is based on “out of date benchmarks” reflecting Nestlé’s ice cream demerger in 2019. A more realistic valuation is £13.5bn, he says.

Froneri spinoff shows the way

Nestlé’s spinoff of Froneri points to the potential of an ice cream business spinning out of a major multinational. Its JV with PAI Partners has grown revenues to €5.3bn in 2023 from less than €4bn in 2020, taking market share off Unilever’s brands. Operating profits have also almost doubled over those four years.

“Unilever has lost some ground on Froneri recently, which is now a serous global competitor in a way it wasn’t a few years ago,” the City source notes. In fact, he suggests Unilever should focus on “running the division better” rather than selling it off, given the “dynamics in the category are good and it’s a very strong business”.

AJ Bell analyst Dan Coatsworth agrees the portfolio “is not short of innovation”. With five of the top 10 selling global ice cream brands it “continues to find new flavours and styles to capture the imagination”.

But he adds: “Being free of the shackles of Unilever, no longer having to follow rules dictated by a conglomerate, management of the ice cream arm will be able to do things quicker and more freely as they won’t have anyone higher up to answer to and greater flexibility to push through ideas.”

While the divestment is still some way away, the obvious question is whether it will be enough to satisfy investors. There is particular speculation over Unilever’s remaining ambient grocery business, including brands like Knorr, Pot Noodle and Marmite. Schumacher has been explicit in ruling out further disposals. But a Unilever source thinks food is a red herring. The only thing that matters now is margin, he says.

“The problem has been that stock buyers don’t know how to value Unilever. The quickest way to re-evaluate it is to drop out the lower multiple items. So this ice cream sale is not about the ice cream business at all. There’s nothing wrong with ice cream. Why is it trying to spin off the best ice cream business in the world? To make it clear what the value is.”