Lipton Tea Brand Breakup; Unilever Brand Divestiture

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Brooke Bond Red Label

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Unilever's traditional, most famous brand - Lipton Yellow Label

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T2 - Unilever's popular brand in Australia

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Pukka night time organic tea

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Tazo tea

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Declining sales of low-cost, commodity grade black tea in developed markets due to changing tastes convinced Unilever to sell most of its $3 billion tea portfolio. The separation of the brands is now complete with a sale likely by year-end.

The record-setting pace of investment flowing into business ventures in the US and Europe suggests Unilever’s timely divestiture of a half dozen tea brands will lead to a sale. Unilever c.e.o. Alan W. Jope said he is also prepared to split off the slow-growing tea division in an IPO or partnership.

During a July earnings call, Jope announced that "the operational separation of our tea business is now substantially complete," but he did not offer a timeline for the divestiture. He said the company created “an attractive standalone business with dedicated leadership. We’re very pleased with the progress we’ve made on the complex separation… we’ve filled 3,500 vacancies around the world, we’ve established the sales organizations in our largest markets. We will start to engage externally very shortly to execute on outcome, and this could be through an IPO, through a sale, or partnership,” said Jope. 

Carving out tea required the creation of more than 50 legal entities and more than 20 sales forces. Unilever will keep its operations in India and remain in the profitable PepsiCo-Lipton joint venture in the US.

Combined Unilever has the biggest tea business in the world

Lipton’s investors are likely to favor a sale. The tea portfolio reported $3 billion turnover in 2020. Global brands include Lipton Yellow Label and Brooke Bond and regional brands such as PG Tips and Lyons and specialty brands TAZO, Pukka Herbals, and Australian-based tea retailers T2. 

Combined, the division is the biggest tea business in the world. Still, sales of traditional black tea, the largest segment of the category, have been in decline in developed markets for several years due to changing consumer preferences, according to the company. 

In a news article titled: “Unilever Must Look Mighty Tasty to Hedge Funds” Bloomberg writes that the European consumer sector “has been a fertile hunting ground for activists, with Dan Loeb’s Third Point taking a stake in Nestle SA in 2017 and more recently, Bluebell Capital Partners’ campaign for change at Danone SA. 

Outside investors see the breakup value of Unilever as substantially greater than the whole. Bloomberg estimates the food and refreshment divisions are worth US$62.3 billion (€52.5 billion). Beauty, household, and personal care brands are estimated at $144 billion*, which is greater than the current $184 billion enterprise valuation.

Unilever facing biggest cost increases in raw materials in decades

The food, household, and personal care goliath generated 5.4% sales growth during the second quarter of 2021, but revenue grew sluggishly in 2019 and 2020. Unilever is facing its biggest cost increase in raw materials in decades, a spike that includes logistics, fuel, labor, and tea inputs such including fertilizer, a necessity for large-scale production. The company increased the price of its goods by 2.2% in June. According to a report in Food Navigator, prices will continue to "dynamically" increase, accelerating through 2021. There is some urgency to closing a deal. Overall, Lipton trails rival Nestle. The valuation gap between the two companies is the biggest in 15 years, according to Bloomberg: “Unilever’s shares have underperformed those of Nestle since Jope arrived (in January 2019).”

Buying a division valued in the billions is a big bite, even for a hedge fund. But hedge funds, mutual funds, pensions, sovereign-wealth groups, and other so-called non-traditional venture investors were more active in the second quarter than in any previous period, according to research firm PitchBook Data Inc. The amount of investment for the first half of the year eclipsed full-year funding every year before 2020 and is on pace to nearly double last year’s record. The world’s largest investment funds are participating in a larger share of startup financing deals, accounting for more than three-quarters of all the invested capital. 

* Putting the estimated 2021 earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first on a forward multiple of 16.5 times — in line with consumer peers — generates an enterprise value of €121 billion. The estimate is based on the Bloomberg consensus of analyst's estimates for 2021 operating profit and assuming that depreciation and amortization and share-based compensation, and other non-cash charges are the same as in 2020.