Out of your League: Kraft Heinz Tries to Buy Unilever

Everyone has been out of his or her league at some point in his or her life: you’ve professed your love to the prettiest girl in school or took a class way above your head in academic ability, and both times you’ve fallen flat on your face.  Companies make those mistakes too, and the latest example has to be Kraft Heinz Co’s $143 billion takeover bid of Unilever, the UK based food and consumer products manufacturer.  Unilever flatly denied the bid, saying “it sees no merit, either financial or strategic, for Unilever’s shareholders” and that the proposal “fundamentally undervalues” the company.[1]

However, the bigger news here is why Unilever spurned the deal and potentially why they should not have.  For starters, Unilever looked at Kraft Heinz’s debt and credit rating (significantly worse than most players in the industry at a BBB- credit rating) and determined that adding on additional debt in such a significant manner was not sound financial reasoning.  Moreover, Unilever probably took a look at the Berkshire Hathaway and 3G Capital backed firm, and its strictly bottom-line-focused company culture, and determined that the two wouldn’t be very compatible, due to Unilever’s focus on sustainability and long-term profit.[2]

Image result for unilever and kraft heinz graph
Captured from the Chicago Business Journal

But the biggest reason at all for the rejection may be the simple truth that Kraft Heinz didn’t do its homework when valuing the UK company.  While Kraft Heinz has its reasons for going after Unilever – in that the combined firm would be the second largest food distributer in the world, able to leverage a larger manufacturing and marketing setup – Unilever has less reason to acquiesce to the buyout, due to Unilever’s relatively strong market positions in Europe and Asia.  This is something Kraft Heinz doesn’t have yet, since a full 70% ($4.84 billion) of the company’s sales come from the United States alone.[3]

However, external pressure from several different sources might make the buyout more tantalizing in the coming weeks, before the deal has to be closed on March 17th.  Food distributers are struggling in the face of changing consumer tastes, which have continued to shift to more local, natural food products and away from overly-processed ingredients.  Financial concerns also have Unilever carefully considering the deal.  The company’s shares fell 4.5% alone on January 26th due to bad 4th quarter results, but since the news of the bid have risen over 13% on February 18th to a record high, carrying Kraft Heinz along with them with an 11% gain in the NASDAQ.[4]  In addition, the temptation to leverage a supply chain and marketing strategy of the combined company, amidst falling revenues and rising costs, might be too good to be true for Unilever, which indeed has been struggling along with other players in the industry besides Kraft Heinz (Kellogg’s, General Mills, Campbell’s, etc.)

At the end of the day, what we need to remember as consumer is what is this likely going to offer us.  We know that at this point that the size of each company, in comparison to the industry separately and also together, would not make them big enough to raise prices should they combine.  There are just too many market forces at play, and Kraft Heinz’s goal to decrease costs would most certainly pass at least some of those savings onto the consumer.  At the same time, we should remember that sometimes, it makes more sense for companies to stay competitors, even if they have some competitive advantage to gain from merging.  Consider that Unilever derives 60% of its revenue from non-food consumer products; Kraft Heinz getting its hands into a substantial business which it has no knowledge or experience managing could be a drain on what Unilever does ostensibly better.

While there isn’t necessarily a right answer here, and it seems likely that Unilever will continue to deny the bid anyway, we should be wary of what large companies are up to.  Even out of your league individuals sometimes end up getting what they want, which Kraft Heinz might end up getting if it plays its cards right.

[1] http://www.cnbc.com/2017/02/17/kraft-heinz-proposes-merger-deal-which-unilever-rejects.html

[2] https://www.bloomberg.com/news/articles/2017-02-18/kraft-heinz-takeover-bid-shakes-up-big-food-and-its-slow-growth

[3] http://www.reuters.com/article/us-unilever-m-a-kraft-idUSKBN15W18Y

[4] http://seekingalpha.com/news/3244566-unilever-dilemma-comes-now

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