Lately, the M&A market has been experiencing a lot of hustle, and the recent failure of a mega-deal between two consumer giants Kraft and Unilever, stunned the food industry as well as the financial world.
Warren Buffett, the best known American investor and owner of Berkshire Hathaway, proposed a mega-deal in the global food industry. Kraft Heinz, a company run by 3G Capital Partners and Buffet, made a $143 billion bid for the global giant Unilever which is an Anglo-Dutch multinational consumer goods company with headquarters in Rotterdam, Netherlands, and London, United Kingdom.
Post this announcement, a strong prediction about the success of this bid was made by most analysts. It was also assumed that this bid would eventually increase the share prices of both the companies, hence creating a global consumer goods behemoth (The Guardian, 2017)
Shockingly, within 48 hours of this audacious bid, the bid was withdrawn by Kraft. This sudden withdrawal brought a lot of speculation about the two companies. It is assumed that the deal’s economics were apt, but analysts missed on the politics around this merger.
This tie-up has been one of the biggest news in the market since last week because of the sudden withdrawal of the proposed merger by Buffet.
What was the intention behind Kraft’s bid for Unilever?
Kraft being a packaged food business has been doing poorly on the Dow Jones, DJIA in the previous year, suffering from stagnant sales. Some of the reasons for this underperformance of the packaged food industry are:
- Slowdown of sales and profits.
- Change in consumer taste from packaged to fresh foods.
- Challenges posed by new entrants in the food industry.
- Dividend-hungry investors came up with pricey stocks.
As stated by Mark Astrachan, an analyst with Stifel, “Food doesn’t grow as a fast as [home and personal care].” It was predicted that this tie-up would bring together the fifth and third-largest consumer food firms (The Economic Times, 2017).
Hence, I feel, in order to revive the company and its profits, Kraft needs a deal that would help in cutting costs. A merger with Unilever, which is both a food and personal care company, Kraft Heinz, could have benefitted from this mega-deal, creating mega FMCG player in the market.
What are the potential reasons behind failure of this mega-deal?
According to Thomson Reuters, the success of this deal could have made history, being the third-biggest takeover till date with $82 billion sales in the combined entity. But, analysts say that there are several reasons for the public withdrawal of this offer, which have created a buzz in the M&A market. Some of these assumptions have been around the regulatory requirements and takeover rules in U.K. Some other key concerns responsible for this withdrawal have been the differences in the cultures and business models of the two companies.
One of the major controversies around this news has brought in light the statements by the British Prime Minister Theresa May. May has previously criticised Kraft’s acquisition of Cadbury Plc, another British household name. She has recently voiced her opinions about the government playing a prominent role in proposed foreign acquisitions of UK companies.
In my opinion, the success of this deal could have increased the job loss in UK, which encouraged the UK government to attempt to block this deal. Also, this deal would have been against Trump’s policy of investing money in the States, making the success of this deal a possible reason for sour relations between the two nations (Fortune.com, 2017).
I feel, the most important outcome of this dubious deal between these two consumer giants has been the plunging share prices of Unilever after this sudden withdrawal. Unilever saw the worst day in more than a decade after Kraft Heinz’s walkout from the takeover bid.
Kraft Heinz, backed by Berkshire Hathaway, run by Warren Buffett has a good financial capacity for a large acquisition and can easily make successful deals with large brand conglomerates. Unilever, on the other hand, is facing pressure to speed up shareholders’ returns, following this bid from Kraft Heinz, which has put Unilever group’s structure and profitability under public scrutiny. Therefore, Unilever group has decided to conduct a root-and-branch review of its business just few days after an aborted deal from Kraft Heinz.
The failure of such a strong proposition was surely unprecedented becoming the third largest deal in the M&A market, that has collapsed (Vccircle.com, 2017).