Unilever/Kraft Heinz: knives out Premium
The deal makes sense strategically and its logic rests on cost savings
What would Lord Leverhulme, the philanthropic founder of Lever Brothers, have made of 3G Capital? On Friday Kraft Heinz, backed by the private equity group, confirmed it had presented a $143bn cash and shares bid to Unilever. The success of its overture will hinge on whether his successors will embrace a tougher version of shareholder capitalism.
Strategically, the combination makes sense for Kraft. Its profits are generated overwhelmingly in the US, whereas Unilever is much stronger in emerging markets. The European company also has a position in personal goods, where margins tend to be higher. Both companies have struggled to increase sales recently.
Any deal is likely to face stiff political opposition, just as bids for Cadbury and AstraZeneca did. Kraft Heinz will doubtless tout the backing of folksy investment hero Warren Buffett, who owns 43 per cent of it.
But the deal’s logic rests on cost savings. Kraft would need to cut more than $3bn from Unilever’s annual costs to cover the premium offered and still enhance earnings. It would only need to get Unilever’s operating margins half way to its own level for the deal to wash its face, on current terms.
Unilever has rejected those, and its shares rose 11 per cent after news of the approach. Kraft Heinz will need to offer more. Two things suggest it could. One is the possibility of fresh equity from Mr Buffett and 3G, raising its firepower. The other is its own record: Kraft Heinz’s margins before interest, tax, depreciation and amortisation have doubled since 2013, driven by cost reductions.