In a shocking and unexpected recent development, the largest takeover of a British company fell through. Last month it was reported that Kraft Heinz was about to make an offer for Unilever, a consumer goods company with annual sales of $56bn and a strong global workforce consisting of approximately 170,000 employees. Despite being much smaller than Unilever, Kraft Heinz could easily afford a debt-fueled acquisition.
If it were not for the backing of two intimidating deal-makers, Warren Buffet and 3G Capital, the secretive private equity group responsible for toppling consumer industries ranging from beer to fast-food, perhaps this deal would have been laughed out the door by Unilever. However, the presence of the aforementioned parties demanded respect, and thus the proposition was considered seriously by Unilever management.
Unilever’s CEO voiced that the offer had no merit and it was brushed aside steadfastly. Moreover, the $50-a-share bid was also viewed as one that would severely devalue the company.
The Big League
A deal would have led to the creation of the world’s second-largest consumer company by sales, behind only Nestlé. For Kraft Heinz, in particular, the deal would have tripled last year’s annual sales of approximately $27bn and given the company, which is largely US-centric, a further reach into economies such as India, China and South Africa, markets dominated by Unilever.
However, the aforementioned reasons are just a small glimpse into the reasoning behind the rejection of the takeover bid. Paul Polman, Unilever’s’ Chief Executive, had a simple message for investors when he became CEO – do not bother unless you are prepared to sacrifice short-term profits for sustainable and long-term growth. Unilever was created more than a century ago with the aim of reducing disease through soap manufacturing.
As such, Polman views himself as a champion of responsible capitalism, often campaigning for the need for a balance between profitability and long-term sustainability. From Kraft Heinz’ view, the takeover makes strategic and fiscal sense. Unilever has a plethora of brands, ranging from soap to tea and perhaps most appealing for 3G Capital is the fact that Kraft Heinz’s operating profit margins are twice those of Unilever, thus offering good cost-cutting prospects.
Two Different Worlds
Evidently, there is a stark contrast between the philosophies of the two consumer giants. Therefore, this clash in philosophy between Unilever and Kraft Heinz is the key reason behind the fallout of the takeover bid. 3G, the hard-headed PE investor, believes that “costs are like fingernails; they always need to be cut”, and its entire investment strategy is based on acquiring a business, cutting costs to boost short-term profits and then moving onto a new acquisition cycle.
This is what 3G has done with several US food groups, including Restaurant Brands (the owner of Burger King and Tim Hortons) and, of course, Kraft Heinz itself, and it is what it intended to do with Unilever. Alas, it was Unilever that emerged victorious in the battle of wills between Polman and the aggressive mercenary that is 3G Capital.