Unilever rejects Kraft Heinz’s initial bid
Kraft Heinz has made an initial offer of $143 billion to acquire Unilever; its bid is likely to be raised.
Regulatory risk to the deal is significant, but both companies own so many brands that are, in effect, discrete businesses, that meeting regulatory demands should pose few problems.
The strategic rationale appears to favor Kraft Heinz shareholders, but full details of its intentions are not yet available.
On February 17, Kraft Heinz (Nasdaq:KHC) approached Unilever (NYSE:UL, NYSE:UN) with an offer to buy it out for $30.23 in cash plus 0.222 Kraft Heinz shares, a total consideration of some $143 billion and an 18% premium over Unilever’s closing share price the previous day. Unilever promptly rejected the offer in no uncertain terms, but Kraft Heinz indicated to the press that it intends to pursue the idea.
The offer certainly has an element of opportunism to it, which doubtless has not impressed the target. Unilever’s share price has suffered since October as a result of a weaker-than-expected Q3 report and an uninspiring revenue growth outlook. Prior to that, Kraft Heinz’s proposed deal structure did not look anywhere near so generous, although it still offered a premium.
Markets’ reaction to the bid suggests that arbitrageurs are not expecting the matter to end with Unilever’s initial rejection of the idea. Unilever ended the day up 13.4%, yet the price premium of Kraft Heinz’s offer remained 9.4%. This is because Kraft Heinz’s share price also rose on the announcement, by 10.7% ─ a fairly remarkable development for a company making so large an offer.
Unilever is probably right to hang tough on valuation grounds: while it certainly faces some challenges in recapturing the unit growth it has enjoyed in recent years, the prospect of doing so is not so daunting as they might seem, given some stabilization among emerging market economies. Further, the strategic logic of the combination is not entirely clear, and probably more to the benefit of Kraft Heinz shareholders than Unilever’s. And the financial condition of Kraft Heinz means that purchasing Unilever, even at such a price, would be something of a stretch, leaving the resulting company rather highly leveraged by the standards of consumer staples businesses.
Any deal so large would inevitably face regulatory scrutiny. This is a wild card, particularly in the European Union, because the E.U. is so arbitrary in its definition of what constitutes a market, and therefore the extent of market dominance. As a trivial example that may nevertheless be significant for the proposed combination, do ketchup and mustard constitute separate categories (in which case the group might face no problems retaining these products) or are they both components of the condiment market (in which case the combination might be forced to make disposals)? The proposed deal will probably face fewer challenges in other jurisdictions.
a big one here..unilever are massive..and one of the major players in global business..kraft heinz is in the same boat..so you have two absolute behemoths coming together..consolidation..
“Any deal so large would inevitably face regulatory scrutiny. This is a wild card, particularly in the European Union, because the E.U. is so arbitrary in its definition of what constitutes a market, and therefore the extent of market dominance.”
no wild card..it will be passed when required..