Terry Smith: Unilever misled me over $66bn food merger

Terry Smith has never made much secret of his impatience with corporate theatre. The Fundsmith founder speaks in the clipped idiom of a long-term investor who believes that most of what passes for strategy is an expensive distraction from the unglamorous work of making soap, selling mayonnaise and earning a decent return on the capital employed. So when he accuses Unilever of misleading him, it lands with a particular kind of force: not the anger of a spurned speculator, but the irritation of a shareholder who thought he was being addressed in plain language and later discovered the words could be read another way.

Smith’s latest broadside concerns Unilever’s plan to separate its food business and combine it with McCormick in a transaction valued at about $66 billion. It is, by any measure, one of the most ambitious and complex corporate manoeuvres the consumer goods group has attempted in years. It is also the sort of move that tests the trust between a board and the owners it is meant to represent, because it asks investors to accept that a break-up, and a transatlantic merger, is the best route to creating value at precisely the moment when many shareholders had been told the company’s priority was to stop reaching for the toolkit of grand restructurings.

In an update to his investors, Smith said Unilever’s management had assured him after the spin-off of its ice cream arm late last year that there would be no more major disposals “for the foreseeable future”. The words matter because they go to the heart of how Smith and others assess a management team: not simply by what it does, but by what it says it will do, and how quickly those assurances expire. In March, Unilever unveiled plans that look, to Smith, like precisely the opposite of continuity: a major separation, a mega-merger, and a radically altered corporate footprint.

Smith is no longer a Unilever shareholder. He sold his entire stake in May, ending a relationship that had made him one of the group’s most prominent long-term backers for more than a decade. He framed that decision as a response to what he saw as Unilever abandoning “promised operational focus in favour of activist-driven break-ups”. That is not, in the usual run of City communications, a neutral sentence. It was a warning to other investors that the company’s internal compass was wobbling, and that the gravitational pull of activist thinking had become harder to resist.

Now he is sharpening the argument. The merger with McCormick, he said, “flies in the face of what we were told”, and he added that it has “all the hallmarks of Nelson Peltz”, the activist investor whose Trian Fund took a stake in Unilever in 2022 and who sits on the board. Smith’s critique is not simply about whether the deal is good or bad in spreadsheet terms. It is about who is driving Unilever’s decision-making, and whether the company is starting to behave like an organisation that is constantly responding to pressure rather than executing a settled plan.

In Smith’s worldview, the temptation to tinker is one of the great sins of modern corporate life. He has long argued that most companies would be better off doing less, not more: fewer transformative deals, fewer headline-grabbing reorganisations, fewer expensive attempts to outsmart competitors with financial engineering. “We are not fans of the idea that corporate activity solves fundamental problems,” he wrote. Nor, he added, is he a fan of boards that “listen to activists who are not long-term investors”. The line is neatly aimed at Peltz, but it also lands on a wider class of directors who, in the era of restless capital and quarterly scrutiny, often prefer the appearance of decisive action to the slower discipline of operational improvement.

Unilever’s supporters would argue that the company is not indulging in theatre but adapting to an uncomfortable reality: its sprawling portfolio, from Dove and Axe to Domestos, has not always translated into the sort of growth and returns that justify its scale. The group has spent years wrestling with the problem of being big in categories that are mature, competitive and increasingly exposed to private label pressure. Growth can be coaxed out of such businesses, but it tends to come from incremental execution rather than corporate fireworks. That is precisely why the decision to pursue a large, complex deal invites suspicion. If the job is to run existing brands better, why reach for a structural overhaul?

Part of the answer lies in the internal logic of separation. By carving out divisions and giving them their own management teams and investor bases, companies can claim they are allowing each business to be valued on its own merits. Unilever has already pushed through the spin-out of its ice cream division, now branded as the Magnum Ice Cream Company. The proposed food separation would go further, creating a new entity in combination with McCormick, the US group known for Cholula hot sauce and Old Bay seasoning. Unilever’s food brands include stalwarts such as Hellmann’s mayonnaise and Marmite, names that sit deep in kitchens and pantries, and which have historically offered the sort of dependable cash generation that conglomerates love.

But dependable is not the same as glamorous. Investors often pay higher multiples for focused “pure play” businesses, especially those that can claim a clearer growth narrative. The promise from Unilever’s side is that the transaction will deliver a “growth-led separation” at an “attractive valuation”, creating two stronger businesses. In boardrooms, such language is a familiar blend of reassurance and aspiration. It does not, on its own, answer the awkward question Smith is raising: if this was the plan, why tell a top-ten shareholder there would be no major disposals for the foreseeable future?

The tension is sharpened by the governance backdrop. Under new UK listing rules introduced in 2024, Unilever shareholders will not get a vote on the deal. Unilever investors are expected to receive 65 per cent of the new group’s shares, yet they are being asked to accept that the board has both the authority and the obligation to decide on their behalf. For many shareholders, a lack of formal say is not simply a procedural footnote. It changes the psychological contract. If boards can push through transformative deals without a vote, then the quality of board judgement, and the transparency of its reasoning, becomes even more central.

At Unilever’s most recent annual general meeting, some investors criticised management for proceeding without putting the transaction to a vote. Fernando Fernández, who became chief executive in March last year after replacing Hein Schumacher, defended the approach, arguing that no company had put such a deal to a shareholder vote since the listing rules changed. “The responsibility of the transaction lies with the board,” he said, adding that it was a unanimous decision based on the value creation it would deliver.

Unanimity is meant to signal conviction. It can also suggest, to sceptics, a board culture in which dissent is muted or settled behind closed doors. In any case, Fernández’s defence points to a deeper issue: as governance frameworks evolve, the balance of power between boards and shareholders can shift in subtle but significant ways. The rulebook may say directors are entitled to decide. The market, however, still decides what it thinks of those decisions, and it can do so abruptly.

Shares in both Unilever and McCormick fell sharply when the transaction was first announced, a reminder that investors are not obliged to accept the board’s view of value creation. Market moves in the days after a deal announcement are not a final verdict, but they are an early referendum on credibility and confidence. When both sides sell off, it can signal a suspicion that the deal is being done more for strategic storytelling than for hard financial advantage, or that the price, the structure, or the debt load is unsettling.

Debt is one of the pressure points here. Some investors have voiced concerns about how much leverage will be placed on the newly created entity, which is expected to be listed in New York. Leverage can be a tool for discipline, forcing management to focus on cash generation and efficiency. It can also be a source of fragility, particularly in consumer categories where input costs, pricing power and volumes can shift quickly when shoppers trade down. In a world of persistent geopolitical shocks and uncertain interest rate paths, debt is no longer an abstract line item. It changes what a company can afford to do when conditions tighten.

Then there is Smith’s separate, and more pointed, criticism of McCormick itself. He knows the business, Fundsmith has owned the stock, and he is unimpressed by what he sees as a record of mediocre capital returns. “We are not convinced they are good enough for the existing business, let alone a massively enlarged one,” he wrote. He highlighted McCormick’s return on invested capital, which he said is consistently in single figures. That is not a throwaway metric in Smith’s investing philosophy. For him, high and sustained returns on capital are the clearest evidence of a business with pricing power, brand strength and managerial discipline. A single-digit ROIC, particularly if persistent, suggests a company that struggles to turn investment into value.

Unilever might counter that the point of the combination is precisely to create a scale platform with better growth prospects, and that the new group could sharpen McCormick’s performance through portfolio benefits and synergies. Yet synergies are one of the most overused words in deal-making. They can be real, but they are also a comforting story told to justify complexity. The hardest synergies to achieve are often the ones that require changing behaviour across organisations, aligning incentives and integrating supply chains without losing focus on customers.

Smith’s argument, stripped of its sharper edges, is ultimately a plea for managerial humility. He had previously “applauded” Schumacher’s stance when the then chief executive said he had no intention of indulging in acquisitions or divestments until he had improved operational performance across the businesses, benchmarked against the best competitors. That is the sort of promise that resonates with long-term shareholders: fix what you have before you reach for a deal to make the numbers look better. Fernández, Smith acknowledged, had been “very capable” in previous roles as an operating manager and chief financial officer. Yet the speed with which strategic separations followed his appointment is, to Smith, evidence that the gravitational pull inside Unilever favours transaction-making.

This is where the influence of activists becomes more than a footnote. Activist investors like Peltz often argue, with some justification, that large corporates drift. They accumulate brands, tolerate bureaucracy, and become complacent about capital allocation. Activists push for sharper accountability, sometimes by forcing companies to simplify or break up. The best activism can be a corrective. The worst can encourage boards to pursue dramatic moves without sufficient regard for operational reality, or to prioritise moves that deliver short-term valuation pops rather than durable competitive advantage.

Unilever, for its part, insists it is engaging openly with shareholders and will continue to explain the benefits of the transaction. A spokesperson said the deal would create two stronger businesses, each positioned to win in its categories, and reiterated that under the UK rules it was the board’s responsibility to approve the transaction and conclude it was in shareholders’ best interests. That statement is careful, even legalistic. It addresses process and principle. It does not directly answer Smith’s insinuation that shareholders were led to believe the ice cream separation was the end of the disposal story, not the beginning of a larger unravelling.

For investors watching from the sidelines, Smith’s intervention raises two separate questions. The first is whether the McCormick transaction is, on its merits, a good idea: whether the combined food group can grow faster, earn higher returns and justify the complexity and debt. The second is about governance and trust: whether Unilever’s leadership communicates in a way that allows long-term owners to make informed judgements, and whether the new UK listing framework has inadvertently widened the gap between what shareholders can influence and what boards can impose.

Neither question can be answered by rhetoric alone. The numbers will matter, as they always do. So will the execution: how the separation is managed, how the new entity is financed, and whether management can sustain focus through a process that often consumes attention for months, sometimes years. Smith has thrown his verdict into the public square early, and with characteristic bluntness. Unilever’s board, having chosen to proceed without a vote, has left itself less room for missteps and fewer places to hide if the promised value creation proves harder to deliver than the deal documents suggest.