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Why Unilever's Recent Sauces Sale Might Not Best Serve the Giant

Stocks in this article: UL

NEW YORK (TheStreet) -- Today, Unilever (UL) continued its business strategy to improve upon its existing brand portfolio by selling ownership of its Ragu and Bertolli brand sauces in North America to Japan's Mizkan Group for $2.15 billion. While the proceeds from the sale were at the higher end of estimates, expected at between $1.5 billion and $2 billion, investors do not appear to like the deal as U.S.-listed shares fell about 1% following the news.

The company's recent strategy has been to sell off its less profitable and slower-growth businesses -- primarily in North America and within its food brands division -- in order to focus more on its health and beauty products division. However, today's sale might not have been the best deal for the company going forward.

While several of its other brands within the food division have suffered more than others (see: recent sales of Skippy peanut butter, Wishbone salad dressings, Peperami meat snacks, etc.), their Ragu and Bertolli brands deliver combined annual sales of $600 million. Further, Ragu is currently the best-selling pasta sauce in the U.S. Given the popularity of these brands, and the fact that roughly 57% of Unilever's sales already come from emerging markets that are subject to higher levels of currency, economic and political risks, perhaps selling off one of their better-performing food brands in the U.S. is not best course of action.

The other big issue that comes with the continued sale of these assets is what to do with the proceeds. Although it has been stated that the proceeds are to be allocated to fund a portion of the company's acquisition of share rights from one of the founding families, Unilever expressed interest in pursuing "bolt-on" acquisitions that would add to its existing divisions.

This possibility could open the door to additional risks such as overpaying for those assets and/or the failure of the purchased assets to perform as expected. Additionally, the company's strategy to pursue more growth-oriented assets would likely result in further expansion into developing and emerging markets.

Ultimately, the biggest risks to Unilever following the sale announced today include added concentration to its already out-sized reliance on emerging markets as well as how the company will eventually use the cash from these sales. Although the company already yields around 3.5%, some of the proceeds could also be used to buy back shares or pay down some of their existing debt. Follow the money. 

>>Read More: How Will Unilever Stock React to Ragu Business Sale?

>>Read More: 4 International Cos. Outdo U.S. Counterparts: Total, Sanofi, More

>>Read More: 4 Ways Crowdfunding Can Make You a Better Investor -- Just Ask Buffett

At the time of publication the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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