Written by Jennifer Kim
In February 2017, Kraft Heinz made a $143 billion takeover offer for Unilever, which at $50 a share is approximately an 18% premium. However, the proposed deal fell through almost immediately.
The offer to acquire Unilever, a British-Dutch consumer goods company with brands ranging from Dove and Axe to Ben & Jerry’s ice cream came first as a surprise. However, a closer look indicates that the entire packaged foods industry is in decline. Companies are fighting to stay alive either through growth in emerging markets or through mergers and acquisitions. As Kraft Heinz also faces competition from changing consumer tastes and various upstarts, it seems natural for them to be expanding margins by aiming for the latter strategy.
While this offer may have been beneficial for Kraft Heinz, Unilever has since rejected the packaged foods behemoth’s advances. Unilever’s finance chief, Graeme Pitkethly, announced that this offer “substantially undervalued” the company, although the proposed price tag was at a premium to Unilever’s stock. He did not think that the company’s long-term strategy was accounted for in the share price.
Aside from the finances, Unilever’s leadership claims to have rejected this offer due to cultural differences between the two companies. Kraft Heinz is well known for its ruthless job and cost elimination following a takeover. Unilever, on the other hand, has prided itself for including sustainability as part of their mission, and for keeping the culture of brands like Ben & Jerry’s alive.
NYU Stern finance professor Yakov Amihud, however, believes that this reason alone is not enough for Unilever to have declined the deal. If Unilever’s real reason for not going through with the acquisition is indeed culture clash, he thinks management has not done their fiduciary responsibility. He reports, “If management thought that the reward to shareholders in the acquisition exceeds what Unilever could provide on its own, it should have accepted the offer. But because part of the offer was in stock, indeed Unilever’s management should take into account what it thinks will be the long-term effect of the acquisition.”
Political backlash could also have played a part in this deal fall-out. The recent Brexit vote has placed Unilever, a company based in London, under the scrutiny of Theresa May’s conservative government. British officials are wary of the opportunity that the weakened sterling pound brings for international companies looking to snatch up cheap British companies. Members of Parliament have previously voiced their opposition to the deal, especially as they look towards creating stronger industrial policies that safeguard jobs.
Regardless of the reasons for the rejection, there’s no denying that the unexpected Kraft offer has spurred Unilever’s leadership to increase their focus on their short-term value. Unilever released a statement saying, “the events of last week have highlighted the need to capture more quickly the value we see in Unilever.” This is a drastic change from when CEO Polman first came into power in 2009, where one of his first acts was to have Unilever no longer publish quarterly profit updates, saying they too much encouraged short-term thinking.
As for Kraft Heinz, this deal is the first substantial sign of interest that the company has shown in the broader range of consumer goods. It is said that they have a list of other takeover targets, such as personal care companies Clorox, Kimberly-Clark, and Colgate-Palmolive. Professor Amihud, however, believes that Kraft is over-stretching their business. He comments, “if I were to advise them, I would say: merge the food business with yours and sell or spin off the consumer goods business. It is hard to see the value of keeping both together. Firms in the U.S. prefer focus in management and they often divest non-core business.”