Buffett and Lemann feared public battle could have been damaging
Shares in Unilever fell 8 per cent on Monday morning after Kraft Heinz, the Warren Buffett-backed US food group, dropped its $143bn pursuit of its consumer products rival only two days after publicly confirming its interest.
Kraft Heinz said in a joint statement with Unilever that it had “amicably agreed to withdraw its proposal for a combination of the two companies”. A takeover would have created the world’s second-largest consumer goods group by sales behind Nestlé, combining brands such as Kraft Mac & Cheese and Heinz Tomato Ketchup with Unilever’s Dove soap and Magnum ice cream. The companies said: “Unilever and Kraft Heinz hold each other in high regard. Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever.”
Analysis Unilever chief off the hook as Kraft Heinz abandons takeover Paul Polman faced down ambitious adversaries in buyout group 3G Capital Kraft Heinz said in a separate statement that its “interest was made public at an extremely early stage. Our intention was to proceed on a friendly basis, but it was made clear Unilever did not wish to pursue a transaction.”
It added: “It is best to step away early so both companies can focus on their own independent plans to generate value. We remain focused on driving long-term value while always putting our consumers first.”
Two people close to the talks said Warren Buffett and 3G Capital’s Jorge Paulo Lemann, Kraft Heinz’s main shareholders, decided on Sunday morning to withdraw the bid after they concluded that a protracted public battle to take over Unilever would have caused more damage than good. Mr Buffett’s Berkshire Hathaway and Mr Lemann’s 3G control just under 50 per cent of Kraft Heinz shares.
The duo, who would have contributed significant new capital to fund the deal, were also spooked by the hostile response from UK politicians, according to one of these people.
The British government had raised concerns about another large company being acquired by a foreign group in the aftermath of the vote to leave the EU Another person said the early leaking of Kraft’s interest in Unilever made it hard for the US company to negotiate a deal that would have been attractive to both sides.
“Kraft Heinz was ready to make a lot of concessions, including taking on the Unilever name, to make this deal happen but unfortunately it leaked too early and that made it hard to negotiate,” this person said. Kraft Heinz was prepared to “substantially increase” its offer. Both companies began meetings with the UK government over the weekend after British prime minister Theresa May ordered senior officials to examine the proposed takeover to see if it warranted government intervention.
The Kraft Heinz bid would have been a big test for the UK government’s industrial policy. Mrs May had already called for greater powers to prevent predatory takeovers, citing Kraft Foods’ 2010 takeover of UK chocolate maker Cadbury, where the acquirer later reneged on promises to retain factories in Britain. Sir Vince Cable, business secretary during the coalition, tweeted: “Good news #kraft back off #unilever takeover.
But many less famous names are sitting ducks thanks to post #Referendum devaluation.” Our intention was to proceed on a friendly basis, but it was made clear Unilever did not wish to pursue a transaction Kraft Heinz statement
The decision by Kraft Heinz to walk away, marks a significant victory for Unilever chief executive Paul Polman, who becomes the first consumer industry leader to defeat 3G in a public takeover battle. A deal would have brought together two companies with radically different business cultures.
With a stable of slower-growing brands, Kraft Heinz is heavily concentrated in the US and was formed in the last few years through debt-laden deals. Using 3G’s approach to management, it implements aggressive cost-cutting strategies to generate margin expansion that allow it to repay the debt and bolster shareholder returns. Meanwhile, Unilever is better known for its strong brands and presence in some of the biggest emerging markets.
Under Mr Polman, it has also attempted to focus on trying to better balance profitability with environmental sustainability. The company said on Friday that the $50-a-share cash and stock offer, an 18 per cent premium to its closing price on Thursday, “fundamentally undervalues Unilever”. It added: “Unilever rejected the proposal as it sees no merit, either financial or strategic, for Unilever’s shareholders. Unilever does not see the basis for any further discussions.” The unusually strong rejection meant the US group faced an uphill battle to strike a deal.
One person close to Kraft Heinz said the US company had a cordial dialogue in the weeks leading up to the proposal, which was made about 10 days ago, and was surprised by the terse language in the public rejection on Friday. The end of Kraft Heinz’s bid for Unilever will also restart speculation over its next big acquisition target, as analysts had previously thought the US company was more like to go after targets such as Mondelez International, the snacks company, or cereals group General Mills.
Unilever’s UK-listed shares fell more then 8 per cent to £34.86 when markets opened on Monday morning, having risen 13.4 per cent to £37.97 by the end of last week, making its equity worth £114bn. Kraft Heinz shares are also expected to fall on Monday.
The stock had climbed 10.7 per cent to $96.65, giving it a market value of $130.2bn, as its investors anticipated the benefits of the company’s next megadeal. Unilever was defended by law firm Linklaters and bankers at Centerview Partners, Morgan Stanley, UBS and Deutsche Bank. Kraft Heinz was working with law firm Paul Weiss and bankers at Lazard. Additional reporting by George Parker