WILLIAM Breyer hand-churned his first gallon of ice cream in Philadelphia at the end of the Civil War using cream, cane sugar and nuts. With the promise of the finest ingredients, his creation was cranked in a large bucket with a handle turning a paddle inside, and sold to his neighbours.

Fast-forward almost 160 years, and after many reformulations, Breyers is part of a sluggish 17 billion euro (S$24.8 billion) ice-cream unit that Unilever wants to sell or spin off. 

For Hein Schumacher, chief executive officer of the soap-to-stock-cube conglomerate, the timing of his plan to shed the world’s biggest ice-cream operation may be the toughest challenge.

Private equity group PAI Partners is already looking to sell or float its 50 per cent stake in Froneri, the global No 2 ice-cream business, which is seen by some as more innovative and better-run. 

The stakes are high for Unilever. Once a focal point of growth with labels such as Magnum and Cornetto, the Anglo-Dutch company’s ice-cream unit has underperformed for the past five quarters. Previous management failed to arrest a decline in volumes or contain the public relations (PR) fallout over “woke” statements made by Ben & Jerry’s, its best-known brand.

As it stood still, Unilever lost market share to Froneri, maker of Haagen-Dazs, where revenue rose almost 20 per cent in 2022, the latest reported period.

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“It’s an interesting time for Unilever to decide to do this. Froneri is going to be a lot more attractive for investors,” said Chirag Pandya, a partner at McKinsey & Co.

“Froneri has the opportunity of new markets, new channels, whereas Unilever is already global. Unilever’s unit is a poorly operated asset, so the value creation will be down to improving operations.”

Schumacher, though, appointed after activist investor Nelson Peltz – who earlier pursued break-ups at PepsiCo and DuPont de Nemours – joined Unilever’s board, reckons there is more than enough to entice investors. 

Unilever holds a fifth of the global ice-cream market share and has three of the world’s five biggest brands, according to Euromonitor. It’s dominant in the US, where the average American consumes more than 16 pounds of ice cream each year, and recently launched an animal-free version of Breyers using precision fermentation. 

In China, a factory in Taicang, Jiangsu province, is now churning out two million Wall’s, Magnum and Cornetto ice creams every day, and has been recognised for its sophisticated technology. In its home country, Unilever has been engineering smart freezers and artificial intelligence-powered recipes at a research site in Colworth, England, that once developed the humble frozen pea. 

“Ice cream is truly a different business,” Schumacher said earlier this month as he announced the split alongside a plan to cut 7,500 jobs, which he believes will boost medium-term growth and profitability of a conglomerate which has languished for half a decade. 

The Dutch executive has already overhauled and scaled down the ice-cream unit’s management and worked to slash costs, reducing the number of variations it produces as well as restructuring its supply chains in Europe and the US. He moved quickly, but the benefits are expected to materialise only later this year.

While Schumacher thinks a spinoff is the most likely option – and possibly an easier one to pull off than a sale – some private equity firms, including KKR & Co and CVC Capital Partners, are interested in the ice-cream unit as a turnaround. This is because there is a lot that can be done to improve the business, according to a banker who did not want to be identified discussing confidential matters. KKR and CVC declined to comment. 

“The ice-cream business is large enough to stand on its own, yet may be stronger in the hands of the right partner,” said David Samra, managing director of Unilever shareholder Artisan Partners Asset Management.

“The key message here is that this will operate as an independent business, which creates the proper incentives for leadership and allows the business to make aligned investments for the future.”

More existential threats, however, might put some investors off Unilever’s ice cream business as well as Froneri. Among them, the arrival of weight-loss and diabetes drugs such as Wegovy and Ozempic have heaped pressure on Big Food to tweak its strategy as consumer tastes and food cravings change.  

Others might be spooked by Unilever’s fractious relationship with the independent board of Ben & Jerry’s. Dubbed “woke” by critics, in recent years it has pulled the parent company into PR storms after making statements about Gaza and the war in Ukraine. 

Some US pension funds even sold Unilever stock in 2021 after Ben & Jerry’s, the brand started by two friends in Burlington, Vermont, said it would stop selling ice cream in the Occupied Territories, arguing it violated their clause against the boycott of Israel. 

A unique arrangement put in place when Unilever bought Ben & Jerry’s in 2000 allows the brand’s independent board to have a say over its social mission and product quality. It is not clear if that will continue once Unilever sheds the unit.

A new owner would be wise to recognise the value of appealing to “a socially-minded tribe” that is on the rise, said Dev Patnaik, chief executive officer of the strategy firm Jump Associates. “Those that treat it like just another ice-cream brand are likely to destroy much of the value.”

Investor caution

Whatever separation strategy Schumacher ends up pursuing, he has yet to fully win over investors, who are weary from a prolonged spell of under performance and botched merger and acquisitions. 

“While it is positive to see the company accelerating their strategic ambitions, this is a high-growth category where they have leading market share,” said Tineke Frikkee, head of UK equity research at Waverton Investment Management. The Unilever investor said she has mixed feelings about the proposed split, worrying that it could actually stymie growth. 

Selling off divisions does not address wider underlying issues in performance and growth, either. And the assets could be tainted if Unilever tries and fails to turn them around. 

“Unilever’s ice-cream division is being jettisoned partly because it has a lower growth profile than the rest of the group,” said Dan Coatsworth, investment analyst at AJ Bell. “That creates an immediate stigma for the division if it does float on the stock market.” BLOOMBERG