Sector News

It’s the epitome of a rich person’s problem: You make a $143 billion offer to buy something, only to have the bid summarily rejected and then, adding insult to injury, you’re told to shove off.

Essentially, that’s what happened recently when Europe’s Unilever, a giant maker of food, personal care and household products, unceremoniously rejected Chicago- and Pittsburgh-based Kraft Heinz’s buyout bid.

The financial powerhouses behind Kraft Heinz, which include the formidable Brazilian-based 3G Capital private equity firm and investor extraordinaire Warren Buffett’s Berkshire Hathaway, are standing down, but don’t expect their recess to last very long. In the wake of the Kraft Heinz offer, Unilever management said Wednesday it will develop plans to boost shareholder value, which opens up a range of reorganization or asset sale possibilities.

As such, Kraft Heinz soon could make another run for all, or some, of Unilever. Should that prove to be a bridge too far, it may bust a merger move on Deerfield-based rival Mondelez International, which churns out Oreo cookies, Cadbury chocolates and other well-known snacks — some from a plant on Chicago’s South Side.

Be assured, crafty Kraft Heinz is going to buy something big because it intends to be a survivor in a global packaged consumer food business that lives by this credo: Eat or be eaten.

“We still expect a KHC-Unilever (deal) to take place,” predicts industry analyst Pablo Zuanic in an industry report from New York-based Susquehanna Financial Group.

Right now, Susquehanna is in the minority, as other industry observers seem to accept at face value that Kraft Heinz is walking away.

Still, a dose of skepticism is warranted when considering the unusual circumstances surrounding this proposed corporate marriage.

Yes, it is possible Kraft Heinz bungled matters by announcing it would press its bid for the British-Dutch concern although its unsolicited buyout offer had been rebuffed. Later, Kraft Heinz recanted and said it would back off.

But this chain of events doesn’t fit the modus operandi of smart, veteran deal-makers like Buffett’s Berkshire Hathaway and 3G, which drove 2008’s acquisition of beer king Anheuser-Busch by InBev and recently AB InBev’s estimated $100 billion purchase of brewer SABMiller.

It’s way too clumsy.

Maybe, just maybe, this Kraft Heinz and Unilever arrangement wasn’t so hostile or surprising after all.

Indeed, Susquehanna Financial Group’s assessment is that talks between the two companies had gone “quite far.”

In rejecting Kraft Heinz’s $143 billion, or about $50 per share, Unilever said the offer grossly undervalued the company, which sells a wide collection of consumer staples including Dove soap, Hellmann’s mayonnaise and Axe deodorant.

“Our (obvious) interpretation is that negotiations broke down, but that they will resume,” wrote Zuanic, who reasserted that viewpoint in an email to me.

That’s called food for thought.

Having just been rejected by Unilever, Kraft Heinz is prohibited under British law from making another offer for six months.

After that, however, a reworked Kraft Heinz bid for the entire company may resurface.

It also could make a run to bust up Unilever and bid for its food and refreshment lines. Under that scenario, the personal care or household businesses could remain with Unilever.

A case can be made that Kraft Heinz needs Unilever more than the other way around.

The purchase immediately would provide Kraft Heinz with a large overseas presence and the opportunity to expand many of its own domestic brands beyond North America.

More to the point, the buyout would give Kraft Heinz backers the opportunity to do what they do best — cut costs and fire folks.

Already, Kraft Heinz has sliced and diced by eliminating corporate overhead, closing plants and erasing 700 jobs from its north suburban headquarters (before it moved to Chicago) and 2,500 jobs systemwide.

More of the same is on the way as Kraft Heinz is expected to cut $1.5 billion this year and up to $1.7 billion by 2019, according to Morningstar estimates.

The company, known for Kraft cheeses and Heinz ketchup, contends those cost savings are redeployed to come back as higher profits, improved share price and investments in new technology and future products.

Yet the company honchos may be running out of things to cut and need a new platform.

Having 13 brands with over $1 billion in sales and 172,000 employees, Unilever is ripe for similar across-the-board reductions, including factory closings and layoffs.

The specter of a Kraft Heinz type of operational bloodletting frightens many people living in Europe.

Indeed, if there’s a significant obstacle to Kraft Heinz’s wooing Unilever, it’s not necessarily paying a heftier price but convincing European regulators, who frown upon shuttering facilities and sacking workers, to approve the transaction.

Should Unilever not pan out, there’s speculation that Kraft Heinz will turn its sights on Mondelez. Late last year, Bloomberg reported that Kraft Heinz was kicking the snack-maker’s tires but no attempt emerged.

Mondelez would give Kraft Heinz some of Unilever’s inherent advantages. It offers a roster of well-known snacks, along with an overseas distribution network, not to mention employee and facility redundancies that Kraft Heinz could guillotine.

That said, there is no shortage of corporate irony attached to thoughts of Kraft Heinz connecting with Mondelez.

Reconnecting is more like it.

In 2012, Deerfield-based Mondelez came into being when Kraft Foods split into two publicly traded companies. The spun-off North American grocery business, Kraft Foods Group, later merged with Heinz to become the current Kraft Heinz.

It just goes to show.

These days in the multibillion-dollar merger-crazy packaged food business, nobody shoves off for too long.

By Robert Reed

Source: Chicago Tribune