By Saabira Chaudhuri, Annie Gasparro and Anne Steele
Kraft Heinz Co. made a $143 billion unsolicited bid for
Anglo-Dutch rival Unilever PLC, seeking to marry two of the world's
biggest packaged food makers and accelerate an industrywide drive
to cut costs amid slowing sales.
Any deal faces significant hurdles, even if Unilever management
-- which quickly rejected the offer Friday -- ultimately comes
around. The companies are big players in many of the same markets,
so a combination would draw scrutiny by antitrust regulators around
the world. It also could face political hurdles in the U.K. and the
Netherlands, where Unilever has dual headquarters.
Unilever said the cash and stock offer undervalues the company.
Kraft responded that it was committed "to working to reach
agreement on the terms of a transaction," though it said another
offer isn't certain.
If Kraft were to overcome these obstacles, the deal would rank
as the second-largest cross-border transaction on record, behind
Vodafone Group PLC's $172 billion acquisition of Mannesmann in
1999, according to Dealogic. It would combine the No. 4 and No. 5
players in the global, packaged-food industry, bringing under one
roof grocery-store staples like Heinz ketchup and Ben & Jerry's
ice cream.
Shares of Unilever rose more than 13% in London trading. Shares
of Kraft Heinz were up more than 7% in New York.
The offer is also the latest, sweeping foray into the global
consumer-goods industry by Brazilian private-equity firm 3G Capital
Partners L.P. The group, along with Warren Buffett, orchestrated
the 2015 merger of Kraft and Heinz, and remains Kraft's biggest
shareholder.
3G also calls the shots at Anheuser-Busch InBev SA, the global
beer colossus that last year swallowed SAB Miller for more than
$100 billion. 3G has targeted consumer companies it considers
bloated and aggressively slashes costs.
Kraft is making its move at a time when global consumer-goods
giants from Procter & Gamble Co. to Nestlé SA are struggling to
boost sales. Many of their biggest markets are saturated and highly
competitive. That, and stubbornly low inflation, have made it hard
to raise prices to make up for sluggish sales growth.
For food companies, consumer habits have changed radically --
away from the packaged foods that made sense across the developed
world for more than a generation and toward fresh and healthier
offerings from an array of big and small players.
For decades, the rise of baby boomers, more women working and a
trend toward low-fat foods "created a perfect environment for
packaged food growth that came at the expense of fresh foods," said
RBC analyst David Palmer. But over the past several years, much of
that dynamic has changed.
One reason, according to Mr. Palmer: Millennials have begun
having babies. "This has brought a new set of eating
values...today's consumer is avoiding food with sugar and
artificial ingredients," he said.
The industry has tried to pivot. Kraft, for instance, has
removed artificial colors from foods like its famous blue-box
mac-and-cheese, and it created a new brand of frozen meals aimed at
using trendier ingredients to attract younger consumers.
But the biggest players, including Nestle, Unilever and Kraft,
also have scrambled to cut costs to preserve margins. 3G has a
reputation for swift layoffs and scrutiny of even the most minor
costs using "zero-base budgeting." The process calls for
departments to justify every expense anew each year. This week,
Kraft announced plans to squeeze out $200 million more in savings
than it initially targeted in the combination. But its momentum in
improving profitability is slowing.
Unilever Chief Executive Paul Polman rolled out his own version
of zero-base budgeting last year, though margins there are still
significantly lower than they are at Kraft. Unilever's earnings
before interest and taxes are only 15.3% of sales, while Kraft
Heinz's are 30%, said RBC's Mr. Palmer.
A union would bring together brands like Kraft Heinz's
namesakes, Oscar Mayer hot dogs, Planters peanuts, Philadelphia
cream cheese and Maxwell House coffee with Unilever's Hellmann's
mayonnaise, Lipton teas and Ben & Jerry's ice cream.
But Kraft Heinz also would be pushing into uncharted territory,
acquiring Unilever's long list of personal-care and home-care
brands like Dove soaps, Axe deodorant and Surf laundry detergent.
Unilever's Mr. Polman has steered the company away from food and
toward these higher-margin goods, which now make up the bulk of the
company's portfolio.
In a statement Friday, Unilever said Kraft's offer was $50 a
share, in a mix of $30.23 in cash payable in U.S. dollars and 0.222
share of the combined new company.
Unilever said Kraft Heinz's proposal represents a premium of 18%
to its Thursday closing price. Under U.K. takeover rules, Kraft has
until March 17 to make a formal offer sweetening the deal, or it
must walk away.
The deal comes after a steep drop in the value of the pound
against the dollar. Unilever shares, meanwhile, have fallen 7%
since September amid its recently sluggish sales
A person familiar with the matter said Unilever was "surprised"
by the offer. Unilever management views it as an opportunistic play
on the currency and Unilever's share weakness, this person
said.
Should Kraft ultimately convince Unilever on the merits of a
deal, it has other hurdles. Antitrust issues aside, Unilever's
unusual corporate structure and deep roots in Europe could force a
close look by politicians. Unite, Britain's biggest union, on
Friday said it would urge Unilever to reject any offer from Kraft,
which has already courted controversy in the U.K. Critics accuse it
of backtracking on a promise to keep a factory open after it bought
Cadbury in 2010. Kraft has said it tried to keep the factory open,
but later found that plans to move production abroad were too far
along to change.
Unilever is considered one of the Netherlands' corporate jewels.
The company employs around 3,000 people there and operates several
plants and a research lab. Dutch Prime Minister Mark Rutte, who
faces elections next month, is a former human-resources director at
the company. On Friday, he called Unilever "an important company, a
proud company" and said his government will monitor developments.
But he also said it was "primarily Unilever's business and not the
government's."
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com, Annie
Gasparro at annie.gasparro@wsj.com and Anne Steele at
Anne.Steele@wsj.com
(END) Dow Jones Newswires
February 17, 2017 15:00 ET (20:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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