Covid-19 makes companies reconsider unperforming brands

London — From black tea to bottled water, European companies are taking a hard look at underperforming businesses at a time when investors’ profit expectations are already low because of the coronavirus pandemic.

With economies reeling and Covid-19 still spreading across swathes of the globe, top executives are hiring investment bankers or launching internal reviews to sort through portfolios and sell unwanted businesses.

“Investors are writing off 2020 completely but expect a tight, impeccable story for 2021 and 2022,” said Adam Young, the global head of capital markets at advisory firm Rothschild. “Those companies that don’t have one need to look for it pretty quickly.”

Private equity firms from KKR to Blackstone Group are lining up bids for Unilever’s tea unit, which could fetch more than £5bn, people familiar with the matter told Bloomberg News last week.

Lipton Tea

The consumer-goods giant launched a strategic review of the unit in January, as the coronavirus was rampaging through China’s Hubei province. At the time, CEO Alan Jope described the business, which includes well-known brands like Lipton and PG Tips, as “a structural drag on Unilever’s growth”.

In a similar vein, Nestlé is considering a sale of its US mass-market bottled water business, which includes the Poland Spring and Pure Life brands. The division globally had its worst performance in a decade last year and the North American unit, in particular, has seen competition from discount brands, as well as consumer resistance to plastic packaging.

While CEO Mark Schneider hasn’t hesitated to shed underperforming businesses since he took over in 2017, the pandemic could force more boards to follow suit.

“If there’s a business in a company’s portfolio that isn’t performing in line with ambitions, the next two to three years aren’t a great environment to put it back together,” Young said.

Time to act

It’s not only big consumer companies looking to act. Total and Solvay are each pursuing sales of chemical businesses, people familiar with the plans have said. AMS may be positioning Osram Licht’s automotive unit for a sale once its takeover of the German lighting company is complete, according to a worker’s representative and an internal presentation.

Such carveouts may pick up in the second half as companies seek to bolster balance sheets, as well as share prices, in the wake of the pandemic.

Some companies are turning to investors to replenish cash. Budget airline EasyJet raised about £419m in a share sale last week, while carmaker Aston Martin Lagonda tapped investors for around £150m.

“The general thought among boards now is that inaction is not an option,” said Rich Mills, global head of divestments at EY.

PE cash pile

Nearly a third of companies undertaking sales are willing to increase the assets on offer to get the proceeds they need to reinvest, said Mills. He co-authored the consulting firm’s 2020 report on global corporate divestments, which was based on online surveys of more than 1,000 executives before and after the pandemic’s onset.

Many sales are attracting strong interest from private equity buyers sitting on an unprecedented $1.5-trillion in cash, the survey found.

“Companies realise they have to brace for tough times, and that means you need a stronger balance sheet, Romain Boscher, London-based chief investment officer at Fil Investment Management, said.

Bloomberg