Deal or no deal?
Vast American food company Kraft Heinz faced rejection today, after its £115bn takeover proposal for consumer goods group Unilever was rebuffed. Despite the disappointment, both companies seem to be benefitting from the news, with Unilever’s stocks surging after the story broke. Was Unilever right to reject the offer?
The American business, whose offerings range from Heinz ketchup to Philadelphia cheese, said Unilever had declined its approach but suggested a tie-up between the two multinationals is still on the table. Unilever is the second biggest consumer goods company in the world, with brands including Marmite, Persil, Dove, Vaseline and PG Tips.
If a deal can be agreed, it would be the second biggest takeover in corporate history, creating a company with combined sales of $84.8 billion last year. Combining these two giants would creative massive savings in marketing, manufacturing and distribution. With debt cheap and abundant right now, Kraft have spotted their opportunity.
Unilever is significantly larger than its would-be bidder, with revenues of £46bn. The US firm is smaller, but it is controlled by two of the richest men on the planet: legendary 86-year-old investor Warren Buffett and the Brazilian Jorge Lemann.
But names were not enough to convince Unilever. The company announced on Friday that the $50 a share proposal, comprising about two-thirds in cash and a third in new stock, “fundamentally undervalues” the company.
A short term premium is no compensation for losing the growth that Unilever could produce for decades. So winning over Unilever’s shareholders would be tough. It has also been suggested that the reasons for the rejection may be about values rather than value. Unilever has worked hard to get its commitment to Corporate Social Responsibility and sustainability known. A deal with Kraft Heinz could compromise that. As Corporate band and reputation adviser Spencer Fox suggests on Twitter, the two firms aren’t a good fit: “Unilever is held up as a company with a great reputation founded on solid values. Not sure Kraft would be a good match.”
But in rejecting the offer, Unilever seems to have come across some free publicity. Their shares surged as much as 15 percent to a record in London, valuing the multinational at more than 113 billion pounds ($140 billion). The stock gained as much as 12 percent in Amsterdam. Kraft Heinz also seems to benefitting, gaining about 4.7 percent in premarket trading in New York. Playing hard to get seems to be working.
The US firm confirmed Unilever had declined its proposal but that it looked forward to “working to reach agreement on the terms of a transaction”, suggesting the US firm could return with a better offer.
Consumer choices are changing, we are moving away from processed foods and towards fresher produce. The packaged food businesses have seen sales slow in the last few years and are looking for ways to make savings. With conditions becoming tougher across the globe, companies are searching for new avenues for growth. Capital, the firm that runs Kraft Heinz, is under pressure to either do another major deal or show the company can boost sales. And despite today’s surge, Unilever has reported months of slowing growth.
With the group’s chief executive Paul Polman warning of “tough market conditions” and a challenging 2017, these two corporate giants may have a future together yet.