When Paul Polman became chief executive of Unilever, the consumer goods company which on Friday rejected a $143bn takeover approach from Kraft Heinz, he told investors to steer clear unless they were prepared to sacrifice short-term profit for “sustainable” ideals.
The same message has been delivered to the maker of Kool-Aid drinks and Oscar Mayer hot dogs, with a flat rejection of a deal that would be the second-biggest in corporate history.
A terse exchange of statements on Friday marks the beginning of what could become a battle of wills, pitting the evangelistic Mr Polman against the hard-headed private equity investors who two years ago swore to strip $1.5bn of costs out of the iconic ketchup maker.
They are Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira, who cut their teeth on a series of private equity deals in Brazil in the 1980s.
Their hallmarks are determination, ruthless execution and the mantra that “costs are like [finger]nails; they always need to be cut”.
With the help of Warren Buffett, the billionaire investor and founder of Berkshire Hathaway, their 3G Capital vehicle orchestrated a series of takeovers of US food groups, culminating in the merger of Kraft Heinz in 2015.
3G’s strategy has been a private equity approach of acquiring business, cutting costs to boost profits and then embarking on a new acquisition cycle.
Heinz’s operating profit margins were boosted by 10 percentage points within two years of 3G’s deal, thanks to techniques that included slashing every one of the company’s budgets to zero, and then demanding an explanation from any manager who requested an increase.
“It is a radically different philosophy,” says one frequent visitor to the huge, handsome Art Deco building that houses Unilever’s global headquarters in London.
Unilever was created more than a century ago out of Victorian philanthropist Lord Leverhulme’s ambition to reduce disease through manufacturing soap. Mr Polman sees himself as the voice of responsible capitalism, encouraging long-term investors and preaching the need to balance long-term sustainability with profitability.
He has also presided over investments of about £1bn a year in developing the company’s product range, a decision that has helped the owner of brands including Ben & Jerry’s and Viennetta ice creams to sustain sales growth, which last year was 3.7 per cent.
“[Cutting costs] might work if you’re OK with having no sales growth and making Mac and Cheese,” says a person familiar with management’s thinking. “But Unilever has brands like Magnum and Dove. You have to invest behind those brands.”
Analysts say that, from the point of view of Kraft Heinz, the attractions of the deal are clear.
Unilever has 13 brands with annual sales of more than €1bn, including Dove soap, Magnum ice cream, Sunsilk shampoo and Lipton tea. Most promising for 3G capital is that Kraft Heinz’s operating profit margins of 30 per cent are twice those of Unilever’s 15 per cent, offering good cost-cutting opportunities.
Whereas the US group has been unable to stem revenue declines, Unilever has been selling off slow-growing food businesses and increasing its exposure to faster-growth home and personal care.
Acquiring Unilever would increase Kraft Heinz’s exposure to emerging markets. It makes 75 per cent of its revenues in its home market, whereas Unilever makes 58 per cent of its sales in emerging markets.
That could also help allay the fears of antitrust regulators over a deal that would combine the fourth and fifth-largest packaged food companies in the world, according to research group Euromonitor.
While a combined Kraft Heinz-Unilever would leap into the top spot in food, ahead of Nestlé, it has few national overlaps, although analysts say the companies would be likely to sell a small number of business units to secure antitrust approval.
Perhaps most importantly, analysts say, the Anglo-Dutch company is cheap. Until news of Friday’s takeover bid sent its shares up 13 per cent, it had been underperforming the FTSE 100 on concerns about its performance in emerging markets and Mr Polman’s downbeat outlook of a “challenging” year ahead.
Sterling has fallen sharply since the UK voted to leave the EU. And Kraft Heinz, which made a $50 a share cash and stock offer, has been buoyed by the “Trump trade” — the rise in US equities in the aftermath of Donald Trump’s presidential election victory.
While the US group may be an enthusiastic bidder, analysts say it has a fight on its hands.
Unilever has a complicated shareholding structure, with a dual listing in the Netherlands and the UK, and a related class of securities traded in New York. The Leverhulme Trust, a charitable foundation that holds a sizeable portion of the stock, on Friday declined to discuss the proposed takeover deal.
“The idea to be owned by those guys [3G] is revolting to management, the board and many of its shareholders,” says one person who has spoken to Unilever’s management.
A higher offer might test the resolve of shareholders, however. “Kraft will likely need to raise its offer substantially if it hopes to change the outcome,” according to analysts at RBC Capital Markets. “Unilever’s focus on sustainability might make it very resistant to any further approach from Kraft.”
Still, Unilever’s stern rejection of Kraft Heinz’s offer is unlikely to spook 3G and its tight knit team of advisers, who have a long-running record of closing complicated multibillion-dollar deals. Kraft Heinz has offered to establish three Unilever headquarters: in the UK, the Netherlands and the US, people briefed on the offer said.
In 2015, Anheuser-Busch InBev — a brewer backed by the same three Brazilians as 3G — overcame several attempts by UK-based rival SABMiller to kill its takeover approach. The management of the British group eventually caved to a slightly higher offer.
While it remains unclear how much financing, if any, will come from Mr Buffett’s Berkshire Hathaway, the legendary investor has made no secret of his intention to do more deals with 3G. He also has the firepower: Berkshire had a cash pile of $85bn at the end of September and with profits continuing to pour in from its insurance to railways business portfolio, analysts expect it to have more than $100bn by the end of this year — unless it makes a big acquisition.
At Berkshire’s annual meeting last year, Mr Buffett praised 3G’s managers and defended them against a shareholder’s suggestion that they were undermining Kraft Heinz through overzealous cost-cutting. Many companies had fat that should be cut, he said, adding: “I’ve never seen anyone run things more superbly than 3G.”