Consumer-goods companies such as Unilever, Nestle and Procter & Gamble have struggled to boost sales in generally flat markets in Western Europe and the US. Supermarkets have been cutting prices, forcing producers to hold back on raising theirs in response to rising input and commodity costs. Some companies like Unilever have been reorganising operations to become more efficient and to raise margins.
Although Unilever's frozen foods division has annual sales of around £1.4bn, it has been underperforming in recent years as European consumers opt for fresher alternatives.
The Anglo-Dutch firm has said in the past it would sell the business to concentrate on staple brands such as Hellman's mayonnaise, as spiralling production costs and falling sales continue to shrink profit margins. The divesture is part of Unilever's five-year plan to winnow its portfolio of brands from 1,600 down to 400.
Today the company announced that it had reached an agreement to sell the majority of its European frozen foods business to the Permira Funds for €1.725bn. Unilever expects to complete the deal before the end of the year.
The sale includes the total frozen food portfolio under the Iglo and Bird's Eye brands in Austria, Belgium, France, Germany Greece, Ireland, Netherlands, Portugal and the UK.
Unilever will retain its frozen food business under the brand name Findus in Italy. The sale of the Portuguese business is subject to the agreement of a joint venture partner.
The company's frozen food business in Spain is not included in the sale as it was previously sold to Bonduelle two months ago. Unilever's ice cream business is not included in the sale. Bertolli and the Knorr Frozen brands in North America are not included in the sale.
Cheryl Potter, a partner at Permira, said the portfolio being acquired includes iconic brands the buyout fund hopes to build further.
"The market sees few food deals of this size and very rarely involving brands of this stature," she stated.
The businesses being sold had a turnover of €1,237m in 2005 and an operating profit of €174m. Unilever expects to make a one-off profit, after tax, in excess of €1bn.
Earlier this month Unilever reported an operating margin of 14 per cent in the second quarter 2006 and of 14.4 per cent for the first half year. The margin decline from 14.8 per cent in the first quarter is a sign that the company has so far not managed to increase both sales and operating profit at the same time.
The operating margin for the first half year was one percentage point higher than a year ago, and two percentage points higher in the quarter.
Unilever blamed the margin crunch on increased spending on advertising, promotions in emerging markets, personal care businesses, along with higher commodity costs.
Meanwhile Unilever's increased marketing spending is beginning to pay off. Underlying sales rose by 3.9 per cent in the quarter, compared to the same period last year. Revenues rose by three per cent to €10.2bn.
The company's targets are to achieve an underlying sales growth of between three to five per cent and an operating margin in excess of 15 per cent by 2010. The company is increasing its efforts to cut costs. It is also increasing prices and developing new products to add to the its portfolio, he said.
Turnover increased by 5.8 per cent in the first half year, with the 3.4 per cent underlying sales growth including a 0.7 percentage point increase from price.
In the second quarter underlying sales grew by 3.9 per cent, which included an 0.8 percentage point contribution from pricing.
The food sector accounts for 49 per cent of the Anglo-Dutch group's sales, drinks eight per cent and home and personal care for the rest. As the largest consumers products group in the world the company had a turnover of €39.1bn in 2004. Europe accounts for 43 per cent of sales and the US 32 per cent. Asia and Africa accounts for 25 per cent of turnover.