Kraft Heinz Confirms Merger Move for Unilever

17 Feb 2017 --- Kraft Heinz has made a merger offer for Unilever, it announced today. In a statement Kraft said Unilever had declined an initial offer to combine the two groups, but added they were still in talks. Speculation was sparked by the Financial Times’s Alphaville site, which reported this morning that an approach had been made. UK-listed shares in Unilever shot up 9.5 per cent to 3,679.5p on the news.

Combining the two companies, which will encompass brands from Dove soap to Philadelphia cheese to Heinz baked beans, will "create a leading consumer goods company with a mission of long-term growth and sustainable living," said Kraft. A combination would be the third-biggest takeover in history and the largest acquisition of a Britain-based company, according to Thomson Reuters data.

Kraft has just issued a statement, revealing that it approached Unilever with a proposal to merge the two companies. The statement reads: “Kraft confirms that it has made a comprehensive proposal to Unilever about combining the two groups to create a leading consumer goods company with a mission of long-term growth and sustainable living. While Unilever has declined the proposal, we look forward to working to reach agreement on the terms of a transaction. There can be no certainty that any further formal proposal will be made to the Board of Unilever or that an offer will be made at all or as to the terms of any transaction.”

In a statement, Unilever responded by noting that their proposal represents a premium of 18% to Unilever's share price as at the close of business on 16 February 2017. “This fundamentally undervalues Unilever. Unilever rejected the proposal as it sees no merit, either financial or strategic, for Unilever's shareholders. Unilever does not see the basis for any further discussions. Unilever PLC and Unilever N.V. recommend that shareholders take no action.” 

The proposal received was that Unilever common shareholders would receive $50.00 per share in a mix of $30.23 per share in cash payable in U.S. dollars and 0.222 new enlarged entity shares per existing Unilever share, which valued Unilever at a total equity value of approximately $143 billion. As at the close of business on 16 February 2017, a mix of $30.23 in cash payable in U.S. dollars and 0.222 Kraft Heinz shares per existing Unilever share would value each Unilever common share at $49.61, representing a premium of 18% to Unilever's share price. 

Unilever noted that as stated in the recent announcement by Kraft Heinz, in accordance with Rule 2.6(a) of the City Code on Takeovers and Mergers, by not later than 5.00 pm on 17 March 2017, Kraft Heinz must either announce a firm intention to make an offer for Unilever under Rule 2.7 of the Code or announce that it does not intend to make an offer for Unilever, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies. This deadline will only be extended with the consent of the Takeover Panel in accordance with Rule 2.6(c) of the Code.

Shares in Unilever jumped 13 per cent at publication time, putting them on track for their biggest one-day rise since 1987.

The statement came after reported earlier on Friday that Kraft Heinz had made an approach to Unilever, according to people briefed on the matter. 

Unilever had a market capitalization of £112bn (US$139bn), meaning that any takeover would be one of the largest in history. It is the world’s fourth-largest consumer goods company by sales, with revenues last year of €52.7bn.

A deal would unite some of the biggest brands in the global consumer good industry, adding the likes of Dove and Knorr to the Kraft Heinz roster, which spans Philadelphia cream cheese, ketchup and Weight Watchers.

Unilever is the larger of the two companies by market valuation, worth $120.2bn against $106.2 for Kraft Heinz.

Kraft Heinz was formed in 2015 in a deal backed by Warren Buffett's investment company Berkshire Hathaway. It came after private investment group 3G Capital combined with Berkshire Hathaway four years ago - in a deal announced on Valentine's Day - to acquire the iconic Pittsburgh company H.J. Heinz Co.

3G Capital has a history of taking over companies and aggressively cutting costs. Bernardo Hees, a 3G partner, has slashed jobs and pursued other savings, some of them granular, as CEO of Kraft Heinz. In a 2015 memo to employees, Hees reminded them to print on both sides of the paper, reuse office supplies like binders and turn off computers before leaving the office to cut down on energy costs.The company even went as far as stopping the stocking of the corporate office with free Kraft snacks.

The move is likely to draw huge opposition in the UK, where memories of Kraft's takeover of iconic confectionery company Cadbury and the subsequent job cuts that followed are still raw. Unilever employs about 7,500 people in the UK and estimates its products are in 98 percent of the country’s households. The falling price of sterling in the wake of the Brexit vote is believed to be one of the reasons why major UK companies can be available "on the cheap." 

Vince Cable, who was the UK Business Secretary in the coalition government alongside the now prime minister Theresa May until 2015, argued that she must make her opposition clear, in a call with Bloomberg.“This is an obvious case of a company being undervalued because of sterling’s devaluation since the Brexit referendum,” he said in a telephone interview. “Unilever is a very good company. There’s no question of under-performance or needing new management. The question is, what is the government going to do? They’re pulled hither and thither with Brexit stuff, but this is a very big test of her credibility.”