Analysts weigh in on Kraft's offer for Unilever

Michele Maatouk Sharecast | 17 Feb, 2017 15:03 - Updated: 15:04 | | |

Unilever, consumer goods, Marmite
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As it emerged that London-listed consumer goods group and Marmite owner Unilever has rejected a $143bn offer from Kraft Heinz, analysts weighed in with their views.

Jefferies: “KHC's approach for ULVR comes both as a surprise and a seismic shock to both ULVR and the broader European consumer space, reflecting as it does a bidder with radically different cost and margin aspirations. We think KHC's cash offer would put it on >5x net debt: EBITDA post-deal. We speculate as to whether KHC is really after ULVR's Foods business, which we see as a do-able deal.”

RBC Capital Markets: “This sort of premium has often proven inadequate in consumer staples M&A, so we were not surprised to see Unilever’s explicit rejection. Moreover, the fact that Unilever said it ‘sees no merit, either financial or strategic’ and ‘does not see the basis for any further discussion’ makes us also wonder if Unilever’s focus on sustainability might make it very resistant to any further approach from Kraft. In any case, we believe Kraft will likely need to raise its offer substantially if it hopes to change the outcome.”

Neil Wilson, senior market analyst at ETX Capital: “Unilever rejected the bid but Kraft is likely to make another bid for more cash. It could be a very expensive strategy by Kraft but there is plenty of easy wins in terms of combining operations. Just as well Warren Buffett’s pockets are deep.

“Few initial thoughts – would competition authorities let this one through? It could come up against a number of hurdles as it would create a giant in the sector. EU regulators in particular could be against it.

“Kraft Heinz has the experience to drive the integration. Costs synergies are the name of the game – combing ops and supply chains. Both are coming into this on the back foot a touch. Unilever sales growth has slowed and come in below expectations while Kraft posted a 3.7% drop in the 4th quarter.

“The combined entity would have a huge brand footprint and be able to flex bargain muscles even more with supermarkets.”

Steve Clayton, fund manager of the Hargreaves Lansdown Select UK Shares fund: “This is cheap money meeting industrial logic. Putting portfolios of brands together can create huge synergies across marketing, manufacturing and distribution, even before you think about cutting the combined HQ back to size. Kraft Heinz are attempting a massive push on the Fast Forward button, for to acquire the sheer scale of brands that Unilever represents through one-off acquisitions could take decades. With debt cheap and abundant right now, Kraft have spotted their opportunity.

“Unilever were clearly in no mood to sell, having spurned the first advance, but Kraft Heinz are not put off. But what will Unilever’s shareholders have to say? The long-term boost to portfolios that Unilever has delivered has been enormous. A short term premium today is no compensation for losing the growth that Unilever could produce for decades to come. So to win over a majority of Unilever’s shareholders, we think Kraft Heinz will need to dig very deep indeed.”

Michael Hewson, chief market analyst at CMC Markets: “There will undoubtedly be competition concerns given how big any new company would be, and Kraft is already in the process of drilling down on costs as a result of its recent $100bn merger with Heinz in 2015. It aims to save $1.7bn annually by 2018.

“If Kraft Heinz return with another bid and it is accepted we can expect to see significant push back on this given that there will certainly be significant jobs cuts and given competition concerns there is a good chance the deal may well get blocked.

“UK authorities have already had experience of broken promises by Kraft in the Cadbury takeover a few years ago. It is hard to imagine that they will get duped again, and the politics of this may outweigh the commercials, particularly at a time when the UK government will want to safeguard as many jobs as possible.”

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