A new regulatory hurdle has emerged for Unilever, as the UK’s Competition and Markets Authority has given the company and McCormick a deadline of November 18 to propose solutions to address concerns over their planned food business combination, specifically regarding dry ingredient mixes and dry sauces.
Competition concerns centered on recipe mixes
The Competition and Markets Authority’s decision on November 11 indicates that a full investigation will be conducted unless the companies provide acceptable commitments to alleviate the regulator’s concerns. This decision does not necessarily block the transaction, and the deadline for remedies does not signify a completion date for the deal.
The CMA’s summary identifies a realistic prospect of substantially reduced competition in two UK retail markets, where McCormick’s Schwartz mixes and sauces and Unilever’s Knorr and Colman’s products are sold. The regulator examined whether the combination would weaken the competitive pressure between the suppliers.
In contrast, the authority found no significant overlap in competition concerns between the companies’ mustard products, as it considered English, French, and American-style mustards to be distinct markets based on consumer preferences and supermarket evidence.
Investor reaction and deal structure
On November 11, Unilever’s stock price closed at 4,916 pence in London, a decrease of 23 pence or 0.47%, equivalent to £49.16 per ordinary share. According to the delayed vendor snapshot, which was recorded at 16:58 GMT, research was completed on November 12, Tbilisi time.
Pursuant to the transaction agreement signed in March, Unilever and its shareholders would collectively own 65.0% of the combined company’s fully diluted equity, with Unilever shareholders holding 55.1% and Unilever itself holding 9.9%. Existing McCormick shareholders would retain 35.0% ownership, while Unilever would receive $15.7 billion in cash, subject to adjustments.
The initial agreement valued Unilever Foods at $44.8 billion, representing 13.8 times EBITDA, based on the announced reference price. However, this historical valuation should not be confused with a current cash offer for Unilever shares. The companies originally targeted completion by mid-2027, subject to approvals and other conditions.
Financial outlook and bank ratings
The latest half-year SEC-filed financial report showed €1.5 billion of free cash flow, a 20.3% underlying operating margin, and net debt of €25.961 billion at June 30. These are half-year figures, not new third-quarter cash-flow or earnings disclosures. A review of Unilever’s 2018 results by The FINANCIAL highlights the significant evolution of the company’s Foods & Refreshment business, which previously included ice cream and tea.
Unilever’s growth is strengthening outside of the foods sector, with the company’s October 28 trading statement reporting a 6.7% increase in third-quarter turnover to €13.3 billion and 5.2% underlying sales growth, including 2.9% volume growth. In contrast, the foods segment experienced only 0.1% underlying sales growth, compared to 7.0% growth in the home and personal care segment.
Deutsche Bank upgraded its rating to Buy on November 11, increasing its target price to 5,350p from 5,300p, citing transformation potential and scale. In contrast, UBS maintained its Sell rating and 4,390p target price on October 29, citing cost and margin pressure, while Jefferies reiterated its Underperform rating and 4,000p target price on November 3.
Stock Analysis also notes that Bernstein has a Buy rating with a target price of 5,800p as of November 10, and Bank of America has a Buy rating with a target price of 5,700p as of November 5. Although these labels are standardized, the detailed assumptions and individual target horizons of each firm are not publicly available. Over the next 12 months, stronger home and personal care growth supports the investment case, while remedies, separation costs, and the value of distributed McCormick shares complicate prospective returns.
A vendor forward P/E of 17.44 values the current earnings perimeter and cannot alone establish the value of the post-transaction holdings. Confidence is limited, and investors should monitor the November 18 remedies, underlying volume growth, and separation cash costs.