[LONDON] As the clock ticks toward a takeover deadline, Kraft Heinz Co faces an uphill battle getting Unilever to negotiate.
Publicly, the company has decried Kraft's US$143 billion buyout offer as lacking merit and said there was no basis for further talks. Behind the scenes, Unilever executives have fretted over Kraft's penchant for slashing costs and lack of vision for cultivating brands, according to people familiar with the situation.
Kraft also lacks experience managing home and personal-care businesses, which account for about 60 per cent of Unilever's revenue, they said.
While both companies sell food, Unilever has pursued higher-end brands, such as Ben & Jerry's ice cream and Talenti gelato. Kraft, meanwhile, sells Velveeta and Jell-O.
"If I was Unilever, I would fight this with hand and fist," said Erich Joachimsthaler, a branding expert who runs the Vivaldi consulting firm. "It would crush everything we celebrate about Unilever." Though Unilever publicly rejected the US$50-a-share bid on Friday, Kraft has said it's still pursuing a deal.
The prospect of both reaching an agreement sent shares of Unilever soaring 13 per cent to a record high. The Anglo-Dutch company, which makes Hellmann's mayonnaise and Dove soap, is now valued at more than £114 billion (S$201.8 billion).
The rally makes it more likely that Kraft will increase its offer, a person with knowledge of the bidder's deliberations. Shares of Kraft also jumped on the news, climbing 11 per cent to US$96.65. That values the food giant at US$117.6 billion. An acquisition of Unilever would depend on financing from Kraft's largest investor, Berkshire Hathaway Inc, a separate person familiar with the situation said.
Against that backdrop, Unilever is trying to convince investors that a deal wouldn't make sense. The company has been speaking to shareholders about why it should remain a stand-alone business, arguing that there aren't many synergies between the two entities, said people with knowledge of the matter.
The unsolicited approach from Kraft took Unilever by surprise, they said. Executives didn't expect an offer from Kraft because they see the companies as too different, according to the people. Unilever has less of a focus on food, and it's spent recent years acquiring upstart brands that appeal to millennials. That includes Dollar Shave Club and Seventh Generation.
At issue is whether Unilever's diverse investor base will see Kraft as a strategic fit. BlackRock Inc is its largest shareholder, with a roughly 8 per cent stake. Under UK takeover rules, Kraft has just under a month to make a firm bid - or else it has to walk away for six months.
Kraft's overture follows a 17 per cent slump in the pound against the dollar since Britain voted to leave the European Union, along with Unilever's worst annual stock performance since the financial crisis in 2008. The shares fell 2.5 per cent over the course of 2016, though European rival Nestle fared only marginally better, losing 2 per cent in the same 12 months.
The investors behind 3G Capital, the private equity firm that runs Kraft, succeeded last year in orchestrating Anheuser-Busch InBev SA's purchase of SABMiller Plc for about US$123 billion. In that case, they had support from a large SABMiller shareholder, Altria Group Inc.
The proposal by Kraft, which has dual headquarters in Chicago and Pittsburgh, was about two-thirds in cash and one third in new stock. It's possible that a new offer could just be for Unilever's food interests, according to Jefferies & Co. That would enable Unilever to continue operating its mainstay household and consumer-goods brands.
Unilever also could try to find a white-knight suitor that it sees as more compatible, according to Stifel Financial Corp. analyst Mark Astrachan. That may include companies such as Colgate-Palmolive Co or Kimberly-Clark Corp, he said in a report.
Large consumer-goods companies, facing slowing sales around the world, are increasingly under pressure to merge. Kraft Heinz itself was forged in a US$55 billion combination orchestrated by 3G and Berkshire Hathaway, which is run by Warren Buffett. The two investors had previously teamed up two years earlier on a buyout of HJ Heinz.
There had been speculation that 3G would look to buy another food company and resume a cost-cutting cycle spearheaded by Kraft CEO Bernardo Hees. Mondelez International Inc, General Mills Inc and Kellogg Co had been mentioned as potential targets.
"Kraft Heinz's approach demonstrates the pressure on brand owners to consolidate in the face of international pressure on margins," said Paul Hickman, an analyst at Edison Investment Research.
Kraft's bid represented an 18 per cent premium to Unilever's closing share price on Thursday. The valuation would imply multiples of three times sales and 21 times earnings, "which strikes us as very low," according to analysts at Berenberg.
Combined, Kraft and Unilever would have had sales of US$84.8 billion last year. That would have ranked them second among food and beverage companies, trailing Nestle SA's US$91.2 billion, according to data compiled by Bloomberg.
Among food and beverage transactions, a deal for Unilever would surpass last year's purchase of SABMiller, as well as InBev's earlier acquisition of Anheuser-Busch Cos in 2008 and the 2015 transaction that created Kraft Heinz, according to data compiled by Bloomberg. Brazilian Investors The investors behind the Unilever bid worked on all those deals as well.
3G - founded by Brazilian executives Jorge Paulo Lemann, Marcel Telles, Carlos Alberto Sicupira, Roberto Thompson and Alex Behring - has engineered a series of huge transactions in the food and drink industries. Their approach is to acquire companies, install new managers and slash expenses. 3G also acquired Burger King Worldwide Inc and merged it in 2014 with Canadian doughnut chain Tim Hortons Inc.
Many Unilever investors may be waiting for the big payday that a takeover would bring. Even as Unilever balks at any kind of deal with Kraft, the company could ultimately cave if the terms are sweetened enough, Stifel's Astrachan said.
"Unilever could angle for a higher price," he said.