US company Kraft Heinz’s rapid retreat from its surprise bid for Unilever sent the Anglo-Dutch group’s shares down over seven percent on Monday in London and Amsterdam. They had jumped 13 percent when the offer became public on Friday, but over the weekend the Americans said they were pulling out in the face of stiff resistance.
Kraft didn't realise how hostile their approach would be perceived
The weaker pound since the Brexit vote made the takeover more attractive but the British government recently signalled it would look closely at foreign takeovers especially if job losses were expected.
Politics played a part
Jasper Lawler, Senior Market Analyst at London Capital Group, explained how that could have played into Kraft’s failed plan: “Politics was certainly part of it. We heard a few key government ministers in the UK voicing their disapproval with it. There’s a history with Kraft in the UK. They took over Cadbury a few years ago. There were promises there to maintain jobs in the UK which were abruptly broken not long after the deal.”
Indeed Prime Minister Theresa May had said the 2010 Cadbury takeover was as an example of a takeover that should have been blocked, though her office denied on Monday that it had warned off Kraft.
Dutch Prime Minister Mark Rutte, who used to work at Unilever, had also said he would examine what it would mean for the Netherlands in the “positive and the negative” sense.
However the fact that Unilever’s shares did not lose all of Friday’s gains indicates investors still think there could be some kind of a deal in the future. In addition the aborted bid offer will increase the pressure on Unilever to improve its profit margins.
Jasper Lawler speculated: “Unilever shares are still up on the bid announcement. I think that probably reflects that maybe they’ll come back to the table at a later point, with maybe a more revised, better offer for Unilever, which values it a bit better. It might get a more positive reaction from the board. Or … some smaller transactional deal might take place.”
Unilever Chief Raises the Defenses as Kraft Heinz Circles – Paul Polman is digging in to resist Kraft Heinz’s $… https://t.co/KQnIHfYfcs— TXWSW (@TexasWSW) February 19, 2017
What was behind the approach
Kraft, which is backed by Warren Buffett and the private equity firm 3G, wanted to buy Unilever as part of its strategy to become a global consumer goods giant by buying competitors and cutting costs and jobs to drive profits.
However, the US food group had not factored in Unilever Chief Executive Paul Polman dismissing its offer as having no financial or strategic merit and refusing to come to the table.
The vehemence of this response, along with fears of a political backlash, was enough to put off 86-year old Buffett, whose Berkshire Hathaway has a long-held aversion to making hostile bids, sources told the news agency Reuters.
“Kraft didn’t realise how hostile their approach would be perceived,” one source said.
Good news that 3G/Kraft Heinz has given up on Unilever. 3G are financial engineers/cost cutters. Unilever is too important for that.— Luke Johnson (@LukeJohnsonRCP) February 19, 2017
3G known for debt and cost cutting
A combination of the two firms would have brought together some of the world’s best known brands, from toothpaste to ice creams.
While it would also have combined Kraft’s strength in the United States with Unilever’s in Europe and Asia, it would also have faced a potentially huge cultural clash.
In 2013, 3G, which made its name in corporate America by orchestrating large debt-laden acquisitions and then slashing costs, teamed up with billionaire investor Buffett to acquire Heinz and then bought Kraft two years later.
Unilever feared that a merger with Kraft risked eroding the value of its brands and could impede its expansion in emerging markets, which requires more investment, people familiar with the company’s thinking said.