19th October 2017 was the deadline Unilever gave to private equity bidders to submit first offers for its spreads business, which comprises margarine brands such as Country Crock, Flora, and I Can’t Believe It’s Not Butter. Buyers can bid for the entire business unit or for regional packages. The sale is led by Morgan Stanley and Goldman Sachs and is expected to be executed by the end of 2017.
Unilever has been facing investor pressure to improve its profitability, particularly considering the withdrawn $143 billion Kraft Heinz deal; therefore, the bid comes in a moment when Unilever wants to recover investors´ confidence. This spreads business sale is a consequence of the strategic self-review that it has conducted. Bidders are driven by the unit’s strong profit margins; nevertheless, the valuation might prove difficult with Western customers cutting on bread and margarine in search of more natural food products. A further reason that attracts PE buyers is the fact that they can buy an entire business unit from a large company. It enables them to run businesses more efficiently, cut costs where needed, and add new geographies to seek growth. Therefore, it is not surprising that, although PE firms can place bids for either the entire business unit or for regional packages, none of them have submitted bids for the latter.
This deal is interesting given that it is considered a megadeal—the expected value of the sale is $7 billion. Megadeals these days are extremely rare (last year, there were only two deals greater than $5 billion: the buyouts of MultiPlan and TeamHealth). However, when they do occur, they have a substantial effect on the overall sector.
On 19th November, first bids were placed by some of the largest private equity groups in the US and Europe. As a consequence of the high expected enterprise value of Unilever's spreads business of $7 billion, major parties are taking joint action in club deals to comfortably pay the high price and diversify their risk. There was a clear distinction among the bidders in three large rival groups: Clayton Dubilier & Rice and Bain Capital, CVC Capital Partners and Blackstone, and KKR and Singapore’s sovereign wealth fund GIC. Nevertheless, it was likely that KKR was going to choose another investor for the second-round bids. Additionally, Apollo Global Management was standing on its own since it had recently raised the largest ever private equity fund at approximately $24.6 billion. Another fund that stood on its own was BC Partners.
The second round of auctions took place on the 25th of October. A new team emerged and it is likely to proceed: KKR and Apollo. Moreover, Bain Capital with Clayton Dubilier & Rice (CD&R) will also proceed, whereas the joint offer from Blackstone and CVC Capital, as well as BC Partners have not made it through to this second round. Nevertheless, this does not mean they are totally out because, according to how Unilever has phrased the deal, they can still make a fresh bid.
In an era where private equity deals are getting harder and harder to close (in 2016, global buyout activity decreased from 2015 levels: the number of deals declined 18%, and value dropped by 14%), bidders are willing to benefit from having individuals in their fund that may have a special advantage in respect to improving Unilever´s segment. Vindi Banga, an operating partner at CD&R who previously held a variety of senior roles at Unilever during his time at the company, will give CD&R a competitive advantage in creating value compared to other sponsors. In addition, Bain Capital and CD&R have reached out to James Hill, who previously worked at Unilever for technical operations.
So who will proceed? The joint team of Bain Capital and CD&R could emerge as the leader on this deal because Vindi Banga gives them an advantage over Bain Capital and Clayton Dubilier & Rice. On the other hand, Apollo has much experience in buying businesses from large corporations and creating value; thus, they are willing to play hard to secure control of Unilever's spreads business.