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Kraft Heinz mega merger with Unilever turned down

Matt Atherton

By Matt Atherton+

17-Feb-2017
Last updated on 20-Feb-2017 at 11:08 GMT2017-02-20T11:08:35Z

Kraft Heinz approached Unilever over a potential mega merger
Kraft Heinz approached Unilever over a potential mega merger

Unilever has rejected a multi-million pound mega merger proposal from Kraft Heinz.

US-based food manufacturer Kraft Heinz wanted to create a “leading consumer goods company” with Unilever, it said. But, its mega merger offer was rejected by the Marmite and PG Tips maker.

Unilever claimed it saw “no merit, either financial or strategic” in agreeing to the mega merger deal. It confirmed that Kraft Heinz had proposed a merger, representing a premium of 18% to Unilever’s share price, but said the offer “fundamentally undervalued” it.

Kraft Heinz still hoped to agree a deal with Unilever, it said in a statement.

“Kraft Heinz notes the recent speculation regarding a possible combination of Kraft Heinz and Unilever,” it said. “Kraft Heinz confirms that it has made a comprehensive proposal to Unilever about combining the two groups to create a leading consumer goods company with a mission of long-term growth and sustainable living.”

‘Working to reach agreement’

“While Unilever has declined the proposal, we look forward to working to reach agreement on the terms of a transaction. There can be no certainty that any further formal proposal will be made to the board of Unilever or that an offer will be made at all or as to the terms of any transaction.”

Kraft Heinz’s shares were up 3.7% in premarket New York trading.

Unilever shares were boosted 14% by the merger approach. The company was valued at about £111bn.

A Unilever statement read: “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 proposal received was that Unilever common shareholders would receive $50.00 [£40.25] a share, which valued Unilever at a total equity value of approximately $143bn [£115bn].

Any deal between the two food giants would likely become the biggest deal in the food and drink industry ever, overtaking AB InBev’s acquisition of SABMiller last year, in a deal that was worth about £79bn.

FoodManufacture.co.uk has asked Unilever for comment.

Meanwhile, analyst Edison said the proposed merger demonstrated the pressure on brand owners, owing to “international pressure on margins”.

Edison analyst Paul Hickman said: “Kraft Heinz’s approach demonstrates the pressure on brand owners to consolidate in the face of international pressure on margins and constraints to organic growth opportunities. 

Analysts’ view
  • “Kraft Heinz’s approach demonstrates the pressure on brand owners to consolidate in the face of international pressure on margins and constraints to organic growth opportunities. With about 70% of revenue from Europe and Asia, Unilever’s markets are complimentary to Kraft Heinz, which has around 70% in the US.  Inevitably, Kraft Heinz will not have led with its best offer and a protracted negotiation probably lies ahead.” – Hickman, Edison
  • “Before biting off Heinz, Kraft’s last big chomp for a historic name in food was for Cadbury in 2010. An approach for Unilever is a sure sign of the surge in dollar buying power and the decline in Sterling. Today’s 10% rise in Unilever’s share price means this is cash neutral for a US purchaser compared with if it had approached seven months ago. Unilever’s own share price is also down about 15% from its all-time highs since the UK referendum vote last summer, on concerns about its pace of global sales growth, so the timing of Kraft Heinz’s bid is opportune. Kraft Heinz will look to justify a bid value of Unilever based on its average price over the last three months, which has been oversold and does not reflect the inherent value of long-term cashflows built into Unilever’s model. Kraft, which had already been demerged from Mondelēz snacks arm, is now looking to create a behemoth in the entire food supply chain from ingredients to products on the shop shelf.”Edison director of research Neil Shah
  • “Although there was little incentive for Unilever to accept this initial merger offer, Kraft Heinz and its investment vehicle willingness to pursue a deal could ultimately encourage Unilever to seek to offload some of its food brands, to which Kraft Heinz would seek to apply aggressive cost reductions. While creating synergies in sauces and soups could be a rational for such a deal, a combination of Heinz and Hellmann in mayonnaise could struggle to be given approval by competition authorities. Its search for a mega merger could see Kraft Heinz settle for a smaller deal under which group synergies would be more achievable.”Euromonitor International food analyst Raphael Moreau
  • “A marriage between Kraft Heinz and Unilever would bring into one family some of the world’s most famous consumer brands and give the merged company an unprecedented scale and reach in the global consumer goods sector. Motivation for the deal is less benign, with both businesses suffering growth and sales pressures as brand loyalty is more difficult to engender in increasingly capricious consumers. Growth forecasts for the global packaged goods sector are also restrained prompting greater focus on potential mergers and acquisitions.  Unilever’s markets, focused on Europe and Asia, are complementary to Kraft Heinz’s US-focused business, but whether the two companies’ corporate cultures would be an equally good fit is less certain.  This is no doubt an opening bid, which has been rejected, and we expect Kraft Heinz to come back with a sweeter offer.”Cavendish Corporate Finance partner Jonathan Buxton

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