Best Defense

Unilever-Colgate? Unilever-Nestle?

Polman could address the industry's problem of weak profitability and growth.

Unilever was all smiles when Kraft Heinz Co. abandoned its attempt to buy the U.K. consumer company for $143 billion. In an unusual joint statement, the two companies referred to their "high regard" for each other.

This isn't how bitterly contested takeover situations normally end. The Anglo-Dutch consumer giant must have wanted to end things amicably -- or at least be seen to.

Not Giving Up

Unilever shares have only partly reversed Friday's gains

Source: Bloomberg

Intraday times are displayed in ET.

Why would Unilever help Kraft Heinz save face, given it manifestly doesn't want to be acquired, let alone by the U.S. ketchup maker?

Sure, Unilever is a good-hearted corporate citizen. But it looks like it may need something from Kraft Heinz one day, and is showing the world the pair could do business.

One possibility: CEO Paul Polman has a sale of its food assets in mind, and needs to keep potential buyers sweet.

Kraft Heinz is all food. Almost 60 percent of Unilever's revenue comes from personal products and homecare, things like soap and washing powder. A sale of the food business would let Polman preserve the company's independence and culture, while meeting Kraft Heinz's need for a deal that offers plenty of margin expansion potential.

Food Fade

Growth in Unilever's food business has consistently lagged other divisions

Source: Bloomberg Intelligence

So why not do such a deal now? Perhaps Kraft Heinz wasn't keen, or it really wanted Unilever's faster-growing household products and personal care assets.

Or, it's possible Polman wasn't ready. Conceivably, Unilever wants to bulk up its household and personal care operation before selling the food business.

How could it achieve that? A purchase of New York-based Colgate-Palmolive Co. would fit the bill. With a market value of $64 billion, it's about half Unilever's size, and would be a strategic match, as analysts at Exane point out.

Buying a storied U.S. name might seem tricky in the current climate, but a generous offer may assuage Colgate's managers, making the politics easier.

Alternatively, there is a messier way of getting to the same result -- a deal with Swiss peer Nestle SA. The world's largest food group, with a market value of 228 billion Swiss francs ($227 billion), suffers Unilever's same problems of weak margins and low growth.

Swiss on a Roll

Nestle got most of its 2016 revenue from its beverages and its nutrition businesses

Source: Bloomberg Intelligence

At the very least, it might make sense for the two companies to merge most of their food operations into a joint venture and spin that off, or sell it. There are surprisingly few overlaps: the Swiss have mostly exited ice cream outside North America, while Unilever still makes choc-ices, for instance.

An all-food combination would have combined sales of 32 billion euros ($34 billion). It could be worth 63 billion euros, based on the average sales multiple for the industry.

Ulf Mark Schneider, Nestle's newish CEO, has indicated he's not in the market for big deals, so no one should hold their breath. But a full merger of the pair, with a spin-off of the food unit, would create a global group focused on the faster growing businesses of personal care, pet care and food supplements.

Either way, the consumer industry needs deals to address weak profitability and growth.

Bargain Bin

Unilever is cheaper than peers despite its growing personal and household products business

Source: Bloomberg

Note: Valuation based on enterprise value to estimated Ebitda for the next 12 months

Polman needs to ensure Unilever has the strongest negotiating hand as opportunities arise. For now, that means cutting costs and reducing the company's conglomerate discount. That is where he can still earn his legacy. If he fails, others will do it for him.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Chris Hughes in London at
    Andrea Felsted in London at

    To contact the editor responsible for this story:
    Edward Evans at

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