Kraft walks away from Unilever offer


The Kraft-Unilever proposed merger is the latest deal to fall apart in 2017.

Kraft Heinz Co. made an unsolicited takeover offer for Unilever, the Anglo-Dutch consumer product giant, on Feb. 17 for $143 billion. Kraft’s deal could have been the second largest cross-border deal if it went through, following Vodafone’s acquisition of the German wireless giant Mannesmann that was valued at $180 billion in 2000.

Kraft Heinz Co., controlled by Warren Buffet and 3G Capital, offered an 18 percent premium over Unilever’s closing price the day before the offer was made. Unilever was quick to reject the cash-and-stock offer, claiming that the $50 per share offer severely undervalued the company. There are very few people who would argue with that statement. Buffett is known for buying iconic companies for less than what he calls their “intrinsic value,” a value based on a company’s cash-generating ability and which could be vastly different from the market value.

It is not the first time that Buffett and 3G Capital, a Brazilian investment firm, joined forces to buy a company. Back in 2013, the duo nabbed H. J. Heinz, the ketchup company, and then again in 2015, merged it with Kraft Foods, giving birth to one of the largest consumer food companies on earth. Buffett usually provides the financial backing needed to oversee such large deals to completion, while 3G Capital brings the operational chops needed to cut the bloat in large companies. It is not unusual for 3G Capital to fire hundreds of employees in a matter of days of taking control. There could be significant cost synergies if the deal eventually does go through. Unilever’s operating income margin, or its earnings before interest and taxes, is almost half of that of Kraft’s. The savings could be huge if 3G Capital, the firm that does the dirty work of streamlining operations, could lift the margins up to Kraft Heinz’s level.

The deal seems highly unlikely from an anti-trust perspective and the apparent reluctance of Unilever management. Kraft has assured that it was committed “to working to reach agreement on the terms of a transaction,” but the company made it clear that another offer is highly doubtful. Furthermore, because the firms do most of their business in the same markets, the prospective deal might give regulators a pause on concerns of a monopoly.

In 2010, Kraft closed a plant in the United Kingdom after promising not to do so, stirring up a controversy in the country. European countries are usually considered more employee-friendly. Therefore any attempt to convince regulators and unions that Kraft Heinz Co. has good intentions might prove difficult, especially since Unilever has around 168,000 employees to Kraft’s 41,000. Unilever also generates more than two times the revenue of Kraft. Dutch Prime Minister Mark Rutte, who once worked at Unilever, has said that it is “an important company” for the Netherlands, where it is headquartered, along with the United Kingdom.

The offer has surprised many market experts, as the consumer goods sector has been reeling from issues like low inflation and, highly-volatile currency movements that eat into the profits. In addition, the company faces slow growth in both mature and emerging markets, where the competition is often stronger and the political climate more harsh.

Perhaps Unilever might have been more interested had Kraft proposed the offer three days earlier on Valentine’s Day.

BusinessAmit AgrawalComment