Kraft Heinz makes $143 billion acquisition offer to Unilever

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Events:

  • On February 17, Kraft Heinz [   ( ) ] made an offer to acquire Unilever [   ( ) ] for $143 billion.
  • As per the offer Kraft Heinz is to pay $50 a share to Unilever’s shareholders in the form of $30.23 in cash per Unilever’s share, plus 0.222 in Kraft Heinz shares.
  • The valuation offered is at an 18% premium to Unilever’s closing share price on February 16.
  • Unilever promptly rejected the offer while Kraft Heinz indicated that it could up it’s bid.

Background:

  • Kraft Heinz is backed by Warren Buffett’s Berkshire Hathaway and is run by partner Brazilian private equity firm 3G Capital.
  • In February 2013, Berkshire Hathaway & 3G Capital partnered in the $28 Billion acquisition of Heinz – the then biggest deal in food industry history.
  • 3G Capital partner Bernardo Hees, Heinz’s CEO, drove EBIDTA growth by 35% through focusing on job cuts and plant closures.
  • In March 2015, the two firms partnered again for the $40 Billion acquisition of Kraft Foods – again the then biggest deal in food industry history.
  • Kraft Heinz saw it’s Operating Income and valuation sky rocket despite declining sales driven by cost cutting from plant closures and job cuts.
  • Unilever has been in a phase of undervaluation in the wake of a tumbling Euro post Brexit.

Opinion:

  • The leadership of 3G Capital and Berkshire Hathaway have a very strong and proven track record of cutting costs and turning around businesses in the Food Industry.
  • The current bid significantly undervalues Unilever and may not go through in it’s current state, particularly as Unilever is not in distress.
  • EU politicians could mount roadblocks given 3G Capital’s track record of cutting jobs and closing down plants.
  • Regulatory risk to the deal is significant, given the monopoly a potential merger could lead to in several markets.
  • Strategic opportunity appears to favor Kraft Heinz shareholders at the current bid level – unless revised further.

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