Unilever is simplifying its business in an effort to improve growth and narrow the valuation gap with more focused consumer-goods companies.
The company currently trades at around 11.5 times enterprise value to core earnings, below Procter & Gamble at 14.8 times, L’Oréal at 17.5 times and Coca-Cola at 22.7 times.
The difference reflects growing investor preference for companies with clearer business strategies and stronger exposure to high-growth consumer categories.
Unilever Reduces Its Food Exposure
Unilever’s decision to combine its food division with US spice maker McCormick marks another step in its long-term withdrawal from the food business.
Following the transaction, Unilever will retain an almost 10% stake in the combined company, while its shareholders will own around 55%.
Although food has traditionally generated healthy margins, its growth has lagged behind Unilever’s beauty, personal care and home-care businesses.
Management is now concentrating more heavily on these categories in an attempt to improve the group’s overall growth profile.
Investors Want Results, Not Just Restructuring
While investors generally support Unilever’s simplification strategy, there is still caution surrounding the company’s ability to deliver sustained growth.
The company has gone through several turnaround efforts in the past, making investors reluctant to react strongly to early improvements.
Recent results have provided some encouragement, with Unilever reporting its strongest sales-volume performance in more than a decade.
However, investors are looking for several consecutive quarters of solid volume growth before concluding that the turnaround is sustainable.
Procter & Gamble Provides A Possible Roadmap
Unilever’s restructuring follows a broader trend among large companies that have moved away from diversified conglomerate structures.
Procter & Gamble is frequently cited as an example of how simplifying a portfolio can improve growth and investor valuations.
After exiting food and reducing the number of brands in its portfolio, P&G achieved stronger growth and maintained a valuation premium for many years.
The experience has strengthened the argument that greater focus can help consumer companies improve marketing, innovation and capital allocation.
The Focus Now Shifts To Execution
Under CEO Fernando Fernandez, Unilever has accelerated its portfolio transformation, including the separation of its ice cream business and the proposed combination involving McCormick.
The difficult part now is execution.
Unilever must demonstrate that its beauty, personal-care and home-care businesses can generate enough growth to compensate for the loss of its food operations.
If management delivers stronger volumes, margins and returns, investors could reward the company with a higher valuation multiple.
Unilever Faces A Test Of Investor Confidence
Unilever’s restructuring may help remove the conglomerate discount, but simply selling or separating businesses will not be enough.
Investors now want evidence that a more focused Unilever can deliver consistent volume growth, stronger profitability and better shareholder returns.
The next few quarters will therefore be crucial. If performance continues to improve, the company could gradually close the valuation gap with its more focused competitors. If growth disappoints, investor scepticism is likely to remain.