Breakingviews: Private equity can sweeten Unilever’s tea business

Arthur Brooke, whose company created PG Tips, said good tea unites good company and exhilarates the spirits. It’s not proving so uplifting for Unilever. The Anglo-Dutch consumer goods giant said on Thursday that it was considering a partial or full sale of its tea business. The first option is better than the second and both beat doing nothing.

Revenue from tea brands such as PG Tips and Lipton is barely growing, and ditching them would help Unilever’s underlying sales grow faster than the 2.9% that the company managed last year. That was below the lower end of its target 3%-5% range. Selling divisions has in the past done more to boost growth than buying companies. For example, the sale of Unilever’s spreads business contributed more to underlying sales growth than the lift from the companies that Unilever acquired since 2015.

Getting rid of the tea business completely may not, however, be Chief Executive Alan Jope’s best option. The unit’s EBITDA isn’t disclosed, but if its enterprise value is assumed to be 2.5 times its sales, in line with French peer Danone, which has more exposure to food than Unilever, it could be worth up to 7.5 billion euros including debt. Jope doesn’t need so much cash, not least since there’s no particular need to pay down debt.

He could therefore take a leaf out of Nestlé’s book. Copying the latter’s ice cream joint venture with private equity group PAI Partners would allow Unilever to create a more focused and faster-growing portfolio while keeping a foothold in the tea business which private equity might be able to turn around.

True, it may be tricky to get buyout barons interested in such a sluggish category. But Unilever pulled this off before when it sold its unfashionable spreads business to KKR. Just as KKR viewed the vegetable spreads as part of the meat-free trend, private equity funds may, for example, see opportunities in reinvigorating tired tea brands with new caffeine-free flavours. If this is the case, Jope may be able to have his tea and drink it.

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