USA – Kraft Heinz Company’s $143bn bid for Unilever collapsed just two days after it became public knowledge, with the adamancy of the Anglo-Dutch target’s rejection said to play into billionaire Warren Buffett’s longtime aversion to hostile deals.
The decision not to pursue what could have been the largest-ever takeover in the food and beverage industry came after 3G Capital and Buffett’s Berkshire Hathaway, which together own about half of Kraft Heinz, decided that Unilever’s negative response made a friendly transaction impossible, leaving no choice but to walk away, people with knowledge of the situation said.
Both also believed that a protracted war of words was not in the best interest of Kraft and would risk souring future deal opportunities, the people said, asking not to be named because the process was private.
While there were minor concerns about opposition from the UK government, according to one of the people, the companies were optimistic that they could win the backing of Westminster with a friendly deal.
Prime Minister Theresa May had asked officials to study the proposed takeover in the wake of the country’s vote to exit the EU.
“Kraft Heinz’s interest was made public at an extremely early stage,” spokesperson Michael Mullen said Sunday in an e-mailed statement.
“Our intention was to proceed on a friendly basis, but it was made clear Unilever did not wish to pursue a transaction.
It is best to step away early so both companies can focus on their own independent plans to generate value.”
Unilever, in rejecting the $50-a-share offer, said the proposal “fundamentally undervalues” the household-products maker.
Its management fretted behind the scenes about the cost-cutting model at Kraft, which sells products like Velveeta and Jell-O, and its lack of vision for cultivating brands, people familiar with the situation said.
The quick withdrawal of Kraft’s offer is surprising because Unilever’s defenses were not very formidable, such as its low stock ownership by management, said Ken Shea, a senior analyst at Bloomberg Intelligence. Kraft’s credibility could take a hit, he said.
“The strange episode suggests that Kraft Heinz acted a bit hastily with its takeover plan, and evidently did not think it fully through,” Shea said.
“Also, the timing and size of the bid — coming just after its earnings conference call on Wednesday last week, in which it downplayed the need for acquisitions — likely leaves their Wall Street credibility diminished.”
The proposed deal would have created a company with combined sales of $84.8bn last year, second only to Switzerland-based Nestlé.
The business would be a packaged-food giant, encompassing brands like Kraft Macaroni & Cheese, Heinz Ketchup, Ben & Jerry’s ice cream and Marmite, a concentrated yeast extract spread.
The bid reflected consolidation desires among consumer-goods companies, which are searching for ways to increase profitability as consumer habits shift and conditions for the industry become tougher globally.
Kraft Heinz itself was forged in a $55bn combination orchestrated in 2015 by 3G and Buffett’s Berkshire, which had teamed up two years earlier on a buyout of HJ Heinz.
Berkshire owns about 27% of Kraft Heinz, and 3G holds about 24%, according to data compiled by Bloomberg. In its 2015 annual report, Berkshire said it “will join only with partners making friendly acquisitions”.
While product overlaps between Kraft Heinz and Unilever were minimal, the enlarged company could have created concerns for antitrust officials as the business would gain considerable bargaining leverage over suppliers and supermarkets, said David Kully, an antitrust lawyer at Holland & Knight.
The risk would be that a bigger Kraft Heinz would control such a wide product line that it could impose a price increase on supermarkets by threatening to withhold popular items, said Neil Wilson, an analyst at ETX Capital in London.
“It would create a giant in the sector,” said Wilson.
“The combined entity would have a huge brand footprint and be able to flex bargain muscles even more.”