As the clock ticks toward a takeover deadline, Kraft Heinz Co. faces an uphill battle getting Unilever to negotiate. Publicly, the company has decried Kraftâ€™s $143 billion buyout offer as lacking merit and said there was no basis for further talks. Behind the scenes, Unilever executives have fretted over Kraftâ€™s penchant for slashing costs and lack of vision for cultivating brands, according to people familiar with the situation.
Kraft also lacks experience managing home and personal-care businesses, which account for about 60 percent of Unileverâ€™s revenue, they said. While both companies sell food, Unilever has pursued higher-end brands, such as Ben & Jerryâ€™s ice cream and Talenti gelato. Kraft, meanwhile, sells Velveeta and Jell-O.
â€œIf I was Unilever, I would fight this with hand and fist,â€ said Erich Joachimsthaler, a branding expert who runs the Vivaldi consulting firm. â€œIt would crush everything we celebrate about Unilever.â€ Though Unilever publicly rejected the $50-a-share bid on Friday, Kraft has said itâ€™s still pursuing a deal. The prospect of both reaching an agreement sent shares of Unilever soaring 13 percent to a record high. The Anglo-Dutch company, which makes Hellmannâ€™s mayonnaise and Dove soap, is now valued at more than 114 billion pounds ($142 billion).
The rally makes it more likely that Kraft will increase its offer, a person with knowledge of the bidderâ€™s deliberations. Shares of Kraft also jumped on the news, climbing 11 percent to $96.65. That values the food giant at $117.6 billion. An acquisition of Unilever would depend on financing from Kraftâ€™s largest investor, Berkshire Hathaway Inc., a separate person familiar with the situation said.
Against that backdrop, Unilever is trying to convince investors that a deal wouldnâ€™t make sense. The company has been speaking to shareholders about why it should remain a stand-alone business, arguing that there arenâ€™t many synergies between the two entities, said people with knowledge of matter.
The unsolicited approach from Kraft took Unilever by surprise, they said. Executives didnâ€™t expect an offer from Kraft because they see the companies as too different, according to the people. Unilever has less of a focus on food, and itâ€™s spent recent years acquiring upstart brands that appeal to millennials. That includes Dollar Shave Club and Seventh Generation.
At issue is whether Unileverâ€™s diverse investor base will see Kraft as a strategic fit. BlackRock Inc. is its largest shareholder, with a roughly 8 percent stake. Under UK takeover rules, Kraft has just under a month to make a firm bid â€” or else it has to walk away for six months.
Kraftâ€™s overture follows a 17 percent slump in the pound against the dollar since Britain voted to leave the EU, along with Unileverâ€™s worst annual stock performance since 2008 financial crisis. The shares fell 2.5% over the course of 2016, though European rival Nestle fared only marginally better, losing 2 percent in the same 12 months.
Large consumer-goods companies, facing slowing sales around the world, are increasingly under pressure to merge. Kraft Heinz itself was forged in a $55bn combination orchestrated by 3G and Berkshire Hathaway, which is run by Warren Buffett. The two investors had previously teamed up two years earlier on a buyout of H.J. Heinz.
There had been speculation that 3G would look to buy another food company and resume a cost-cutting cycle spearheaded by Kraft CEO Bernardo Hees. Mondelez International Inc., General Mills Inc. and Kellogg Co. had been mentioned as potential targets.
â€œKraft Heinzâ€™s approach demonstrates the pressure on brand owners to consolidate in the
face of international pressure on margins,â€ said Paul Hickman, an analyst at Edison Investment Research. Kraftâ€™s bid represented an 18 percent premium to Unileverâ€™s closing share price on Thursday. The valuation would imply multiples of three times sales and 21 times earnings, â€œwhich strikes us as very low,â€ according to analysts at Berenberg.
Combined, Kraft and Unilever would have had sales of $84.8 billion last year. That would have ranked them second among food and beverage companies, trailing Nestle SAâ€™s $91.2 billion, according to data compiled by Bloomberg.
Among food and beverage transactions, a deal for Unilever would surpass last yearâ€™s purchase of SABMiller, as well as InBevâ€™s earlier acquisition of Anheuser-Busch Cos. in 2008 and the 2015 transaction that created Kraft Heinz, according to data compiled by Bloomberg.
The investors behind the Unilever bid worked on all those deals as well. 3G â€” founded by Brazilian executives Jorge Paulo Lemann, Marcel Telles, Carlos Alberto Sicupira, Roberto Thompson and Alex Behring â€” has engineered a series of huge transactions in the food and drink industries. Their approach is to acquire companies, install new managers and slash expenses. 3G also acquired Burger King Worldwide Inc. and merged it in 2014 with Canadian doughnut chain Tim Hortons Inc.
Many Unilever investors may be waiting for the big payday that a takeover would bring. Even as Unilever balks at any kind of deal with Kraft, the company could ultimately cave if the terms are sweetened enough, Stifelâ€™s Astrachan said. â€œUnilever could angle for a higher price,â€ he said.