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Unilever must prove itself after failed Kraft plan

Thomas Buckley
Bloomberg News

The collapse of Kraft Heinz Co.’s $143 billion bid to form a global food giant could prove to be just the first step in a long campaign for Unilever Chief Executive Officer Paul Polman.

Having fended off the unsolicited approach after a 48-hour skirmish, Polman now has six months in which to demonstrate to shareholders that the owner of brands like Ben & Jerry’s ice cream and Dove soap is better off on its own. Once that window of protection provided by U.K. takeover rules expires, Unilever could face new proposals from Kraft Heinz.

In a sign that investors still expect some dealmaking, Unilever shares on Monday lost only about half their gains from Friday, when the U.S. company disclosed its approach. Unilever’s market value in London was about 106 billion pounds ($132 billion) in afternoon trading Monday, about 6 billion pounds higher than at Thursday’s close. Kraft Heinz on Sunday withdrew its offer, saying an early leak complicated its takeover ambitions.

“We expect the seismic shock to reverberate for a while yet,” Martin Deboo, an analyst at Jefferies, said in a note. “Kraft Heinz might yet offer a welcome home for some or all of Unilever’s foods assets.”

One possibility would be to separate Unilever’s food operations,which contain stagnant brands like Flora spreads, from home- and personal-care units including Dermalogica skin care, Alan Erskine, an analyst at Credit Suisse, wrote in a note. That would effectively undo the 1929 agreement that combined a British soap provider and a Dutch margarine maker to create Unilever and could give each arm more freedom for mergers and acquisitions.

The decision not to pursue what could have been the largest takeover in the food and beverage industry came after private-equity firm 3G Capital and billionaire Warren Buffett’s Berkshire Hathaway Inc., which together own about half of Kraft Heinz, decided that Unilever’s negative response made a friendly transaction impossible, people with knowledge of the situation said.

Both also believed that a protracted war of words wasn’t in the best interest of Kraft and would risk souring future deal opportunities, the people said, asking not to be named because the process was private.

Even though Kraft Heinz was unable to strike a deal — a rare instance of Buffett failing to secure a takeover target — Polman will face pressure from investors to accelerate growth and boost Unilever’s profit margins. While Polman has already announced cost-cutting plans, he may raise those targets, said James Targett, an analyst at Berenberg.

“The only thing Kraft Heinz could have brought to the business was higher margins,” Targett said by phone. “Unilever needs to demonstrate that they can deliver the solid revenue growth people have come to expect from the company.”

While there were minor concerns about opposition from the U.K. government, according to one of the people familiar, Kraft Heinz was optimistic that it could win the backing of Westminster with a friendly deal. Prime Minister Theresa May had asked officials to study the proposed takeover in the wake of the country’s vote to exit the European Union.

“Kraft Heinz’s interest was made public at an extremely early stage,” spokesman Michael Mullen said Sunday in an emailed statement. “Our intention was to proceed on a friendly basis, but it was made clear Unilever did not wish to pursue a transaction. It is best to step away early so both companies can focus on their own independent plans to generate value.”

Unilever, in rejecting the $50-a-share offer, said the proposal “fundamentally undervalues” the household-products maker. Its management fretted behind the scenes about the cost-cutting model at Kraft, which sells products like Velveeta and Jell-O, and its lack of vision for cultivating brands, people familiar with the situation said.

Unilever shares closed down 7.8 percent Monday in London.

The bid, which would have created the second-largest packaged foods business globally after Nestle SA, reflected consolidation desires among consumer-goods companies, which are searching for ways to increase profitability as consumer habits shift and conditions for the industry become tougher globally. Kraft Heinz itself was forged in a $55 billion combination orchestrated in 2015 by 3G and Buffett’s Berkshire, which had teamed up two years earlier on a buyout of H.J. Heinz.

Berkshire owns about 27 percent of Kraft Heinz, and 3G holds about 24 percent, according to data compiled by Bloomberg. In its 2015 annual report, Berkshire said it “will join only with partners making friendly acquisitions.”