Kraft Heinz bids $143 bln for Unilever in global brand grab

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By Martinne Geller and Pamela Barbaglia | LONDON

LONDON U.S. food company Kraft Heinz Co
made a surprise $143 billion offer for Unilever Plc in
a bid to build a global consumer goods giant, although it was
flatly rejected on Friday by the maker of Lipton tea and Dove
soap.

A combination would be the third-biggest takeover in history
and the largest acquisition of a UK-based company, according to
Thomson Reuters data.

It would bring together some of the world’s best known
brands, from toothpaste to ice creams, and combine Kraft’s strength in the United States with Unilever’s in Europe and
Asia.

The global packaged food industry is grappling with slowing
growth, new competition from upstart brands, deflation in
developed markets and more health-conscious consumers.

Although Kraft, which is controlled by U.S. billionaire
Warren Buffett and private equity firm 3G Capital, said it
looked forward to talking terms, Unilever said it saw no reason
to discuss a deal without financial or strategic merit.

Kraft approached Unilever earlier this week, according to
people familiar with the matter, who declined to be identified
because the approach was confidential.

Kraft believes that investing in innovation would be an
important part of the combined company, one of the people said.
Kraft has also offered to keep three headquarters for the
combined company in the United States, Britain and the
Netherlands, the source added.

Credit rating agency Moody’s characterized the bid for
Unilever as “credit negative” as the combined company would be
more highly financially leveraged. There would be offsetting
benefits such as cost savings, an expanded geographic footprint
and improved product diversification, the agency said.

Kraft wants the combined company’s credit rating to be
investment-grade, according to the sources.

Kraft has until March 17 to make a final bid for Unilever
under UK takeover rules.

Unilever shares rose to a record following news of the
offer, which analysts at Jefferies called a “seismic shock”, and closed 15 percent higher, short of Kraft’s $50 per share offer
price, with the news lifting shares across the sector.

Unilever said Kraft’s proposal included $30.23 per share in
cash, payable in U.S. dollars, and 0.222 of a share in a new
enlarged entity per Unilever share and represented an 18 percent
premium to its share price on Thursday.

“We believe Kraft will likely need to raise its offer
substantially if it hopes to change the outcome,” RBC Capital
Markets analyst David Palmer said in a research note.

Kraft’s move could flush out other bidders for Unilever, but
of the potential rivals, U.S. consumer giant Procter & Gamble Co may face anti-trust hurdles, while pharmaceutical and
consumer packaged goods company Johnson and Johnson
would likely not be interested in household products.

UNILEVER’S CHALLENGES

Unilever, which has struggled recently amid slowing growth
and currency fluctuations, saw its shares tumble 4.5 percent on
Jan. 26, its worst day in nearly a year, when the company
reported lower-than-expected fourth-quarter sales. The share
plunge encouraged Kraft to make an approach, another source
familiar with the matter said, asking not to be named because
the matter is confidential.

Unilever has been hit by a slowdown in emerging markets,
which it and other consumer companies have long relied on for
growth, as well as in its home market, where consumers have been
rattled after “Brexit,” Britain’s decision to leave the European
Union last year.

Brexit pushed down the value of the pound, raising the cost
of producing consumer goods in Britain and straining relations
between the country’s retailers and suppliers.

For Kraft, its move comes as low interest rates and cheap
debt have fuelled big cross-border deals, making it the busiest
start to the year for M&A activity on record.

Still, investors will look at Kraft-Heinz’s own track record
of boosting sales when evaluating whether they can help Unilever
cope with its own slowed growth. Kraft’s sales fell 3.8 percent
to $6.86 billion in the fourth quarter ending Dec. 31, and its
U.S. sales, which account for more than 70 percent of total
sales, fell 3.1 percent to $4.84 billion.

Kraft Heinz shares rose more than 10 percent in New York
trading, helping lift the Nasdaq to a record high.

3G READY TO DEAL

Although Kraft is smaller than Unilever, with a market value
of $106 billion as of Thursday, it is 50.9-percent owned by
Buffett’s Berkshire Hathaway Inc and 3G Capital, which
also controls Anheuser-Busch InBev.

3G, known for driving profits through aggressive cost
cutting, has orchestrated a string of big deals rocking the food
and drink industry, including Anheuser-Busch InBev’s takeover of
SABMiller and the combination of Kraft and Heinz.

A deal would offer opportunities to combine marketing,
manufacturing and distribution in addition to cutting costs, but
some industry analysts said Kraft might not want Unilever’s
household and personal goods brands and could spin them off.

“This is cheap money meeting industrial logic,” said Steve
Clayton, manager of the HL Select UK Shares fund at Hargreaves
Lansdown, which owns Unilever shares.

“Kraft Heinz are attempting a massive push on the fast
forward button … To acquire the sheer scale of brands that
Unilever represents through one-off acquisitions could take
decades,” Clayton added.

Britain’s largest union, Unite, represents employees at
Unilever, according to its website. Unite urged Unilever to
continue fending off the takeover attempt to prevent job losses.

Unilever employs 168,000 people and generates roughly 17
percent of its revenue in the United States compared with
Kraft-Heinz, which generates roughly 78 percent in America.

A recent wave of cross-border deals in Europe is leaving
British businesses vulnerable to possible job cuts. Pegeuot SA’s proposed acquisition of General Motors Co’s
Opel business may eventually lead to heavy restructuring at the
Vauxhall brands, which employ 4,500 people in Britain, sources
said.

Centerview and Morgan Stanley are working with Unilever
alongside UBS and Deutsche Bank, who are also acting as
corporate brokers. Kraft is working with Lazard.

(Additional reporting by Angelika Gruber in Zurich, Danilo
Masoni and Simon Jessop in London and Lauren Hirsch and Greg
Roumeliotis in New York)



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