Could Unilever plc Be Split Up?

A break-up of Unilever (LSE: ULVR) (NYSE: UL.US) has been rumoured for at least a decade now. Hidden value, the argument goes, could be released if an activist investor emerges. While this view has some merit, Unilever’s boss Paul Polman may disagree – and rightly so.

Personal Care (36% of sales; 43% of Ebitda)

The “personal care” unit has almost doubled in size since 2008. It hit revenue of €18 billion at the end of 2013, when its Ebitda margin stood at 19.6% — three full percentage points above Unilever’s Ebitda. Growth stalled last year after a decent run spurred by acquisitions. A bull-case scenario allows for a 12.5x multiple, valuing the division at €44.1 billion. M&A has helped Unilever bulk up the unit and will be key in future.

Foods (27% of sales; 33% of Ebitda)

The valuation of the “foods” unit, which struggled to grow revenue and cash flows in 2013, is at least problematic. It’s a good profit pool but it needs growth to continue to belong to Unilever’s assets portfolio. Targeted divestments should be sought. The unit’s outlook isn’t exactly breathtaking yet its Ebitda margin stands at 19.9%. The division needs growth — and perhaps investment that would dilute returns — in order to attract a premium valuation. Assuming a top-end Ebitda multiple of 10.5x, it’s valued at €28 billion.

Refreshment (19% of sales; 14% of Ebitda)

The operating profitability of the “refreshment” division dilutes the group’s Ebitda although it has help up relatively well through downturns in recent years. Its growth profile isn’t appealing. It’s hard to justify a valuation above 9x Ebitda, i.e. €10.6 billion.

Home Care (18% of sales; 10% of Ebitda)

The “home care” unit is the less profitable in Unilever’s portfolio, but it recorded the steepest growth rate in Ebitda in 2013. Under a best-case scenario, at 9x Ebitda, it’s valued at €7 billion.

(Our calculations do not include separation costs and other break-up costs.)

Is there merit in breaking up Unilever?

According to this back-of-the-envelope SOTP valuation, the enterprise value of Unilever hits £89.8 billion, for an implied share price of £29.2 — which yields just a 10% upside to Unilever’s current valuation. The problem with these four units is that they may struggle to factor in an M&A premium if they were to be run standalone.

Unilever is a solid investment, with a free cash flow yield north of 5% and a 3.5% dividend yield. Leverage is negligible, but challenging conditions in emerging markets weigh on its valuation. Deeper portfolio rationalisation could be the answer.

Last week there was market talk of a possible sale of Danone’s medical nutrition business to Nestle for more than €3 billion. If rumours turn out to be true, investors should rest assured that it won’t take long for Unilever to act – but they should not bank on a break-up.