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Consumer products giant Unilever Plc (UL - Analyst Report) has completed the sale of its Skippy peanut butter business to Austin, MN-based producer of branded food and meat Hormel Foods Corporation (HRL - Analyst Report). However, the sale of the Chinese manufacturing facility is yet to get regulatory approval and is expected to close by the end of 2013.

The two companies agreed on the deal on Jan 3, where Unilever decided to sell its global Skippy businesses and two manufacturing facilities (in U.S. and China) for $700 million in cash.

Introduced in 1932, Skippy holds the second largest market share in the U.S. for natural peanut butter category, after The J.M. Smucker Co (SJM - Analyst Report)’s Jif, according to market researcher Euromonitor International. The total annual sale from Skippy is estimated to be $370 million out of which $100 million is expected from countries outside the U.S.

Unilever has divested the business as a result of a decline in revenues from its foods segment. The company is eager to focus more on the other segments where profitability is higher. On the other hand, the move is seen as an initiative by Hormel to expand its product portfolio in view of increasing raw material costs and reduction in demand of its core products like meat. The decline of consumption of pork and beef has been driven in recent years by higher prices, an uncertain economy and health-related concerns. The cost of grains that are fed to livestock has also risen, inflating the company’s costs.

Overall, we are optimistic about Unilever’s wide portfolio of brands, which helps it to maintain a dominant share in the market. Unilever has been strengthening its portfolio by expanding through a number of acquisitions. Further, Unilever has been divesting its businesses to shed off its non-core operations, thereby optimizing resources and allocating them to more promising markets. In Aug 2012, ConAgra Foods Inc. (CAG - Analyst Report) bought its Bertolli and P.F. Chang's frozen meals brands for $265 million.

However, the company faces high commodity and raw material cost that is impacting its margins since last many quarters. Moreover, we continue to expect an uncertain macro-economic environment, going forward. Though the company forecasts volume gains and strong free cash flow in the near term, commodity cost inflation will continue to be a headwind. Unilever currently holds a Zacks Rank #4 (Sell).

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