(Updates to add Unilever ( UL ) talks with McCormick ( MKC ))

By Richa Naidu

LONDON, March 20 (Reuters) - Unilever ( UL ) is in

talks with McCormick & Company ( MKC ) about selling its foods

business, in a potential deal that would bring together the

British company's Hellmann's and Knorr brands with McCormick's ( MKC )

Cholula hot sauce.

Such a move would mark an acceleration of efforts to reshape

Unilever ( UL ). More than one Unilever ( UL ) CEO has tried to refocus the

company's portfolio by expanding in personal care and beauty,

and selling some food brands.

The food business came under the spotlight again when the

Financial Times reported that Unilever ( UL ) might spin it off, and

had held merger talks with Kraft Heinz ( KHC ) that had ended.

Unilever's ( UL ) shares, which were higher in early trade on

Friday, had fallen to their lowest since July last year as

investors and analysts worried that CEO Fernando Fernandez could

be distracted from the day-to-day running of Unilever ( UL ) by the

potential separation. And they questioned ‌the benefits of such

an action so soon after Unilever's ( UL ) protracted ice cream unit

split.

HOW MUCH IS UNILEVER'S FOOD BUSINESS WORTH?

Unilever's ( UL ) packaged food business accounts for more than a

quarter of group sales, but faces pressures from a shift away

from ultra-processed products, competition from private label

brands, and softer demand as the rise of weight-loss drugs

changes consumer buying habits.

Home to Knorr bouillon powders and Hellmann's condiments,

the division's underlying operating margin - which excludes the

impact of foreign currency exchange rates - was 22.6% of

revenue, outstripping the group's 20% margin last year.

The food business, which also makes Marmite spreads,

reported ​an operating profit of 2.9 billion euros ($3.34

billion) last year, giving it an enterprise value of roughly 30

billion euros, according to Barclays estimates.

SLOWER TO GROW COMPARED WITH THE REST

The business, Unilever's ( UL ) second largest by sales after

personal care, grew at 2.5% last year, more slowly than the rest

of the group and well below the company's own mid-term goal.

Underlying sales growth at Unilever's ( UL ) foods division has

lagged that of other units since the COVID-19 pandemic highs,

repeatedly falling short of the company's annual goal of sales

growth of between 4% and 6%.

Analysts and investors question the long-term prospects of

the packaged food industry when politicians, including U.S.

Health Secretary Robert F. Kennedy Jr, have highlighted the

potential health risks of processed foods.

DEVELOPED MARKETS HAVE REACHED SATURATION

Part of the problem is that the business is operating in two

contexts: developed and emerging markets. Unilever's ( UL ) food

business is growing more slowly in North America and Europe than

in countries such as India and parts of Latin America, where the

group has a stronghold in food and private label products are

less sophisticated, meaning they offer less competition.

"There is more growth in emerging markets, which accounts

for 55% of food for Unilever ( UL ), but it's still not enough to make

up for Europe and the U.S. where the market is saturated,"

Barclays analyst Warren Ackerman said.