Warren Buffett's Kraft Heinz rebuffed after approaching Unilever over £115bn takeover

Marmite
Unilever makes Marmite and has 13 brands which generate over €1bn in revenues including Dove, Hellmanns and Surf

Investors in Unilever signalled a prolonged takeover battle could be in prospect after its shares hit a record high despite the Anglo-Dutch consumer giant rebuffing  an audacious £115bn bid approach from Kraft Heinz.

The surprise approach for the maker of Dove soap and Flora margarine stunned the market and provoked a furious response from ­Unilever’s board, which accused its US rival of “fundamentally undervaluing” the business.

The FTSE 100 mainstay, led by  Paul Polman, attempted to dampen hopes of a deal by stressing that it didn’t see “the basis for any further discussions”.

But that did not stop Unilever’s shares soaring 13.4pc, or 449.5p, to close at £37.97, a record high, but below the indicative $50 (£47) a share approach from Kraft Heinz.

A combination between the two com­panies would be the second largest deal in history and unite famous brands including Dairylea cheese, Heinz tomato ketchup and Marmite, creating the world’s largest consumer goods giant.

The Anglo-Dutch giant said it had dismissed the proposal, which leaked out yesterday  morning following newspaper reports, “as it sees no merit, either financial or strategic” for Unilever’s shareholders.

However, Kraft Heinz, which is owned by Brazilian private equity outfit 3G and billionaire Warren Buffett’s Berkshire Hathaway, remains hopeful of a deal and said that it “look[ed] forward to working to reach agreement.”

3G has shot to global prominence due to its aggressive cost-cutting approach known as zero-based budgeting and its role in a string of high profile mergers and acquisitions including Burger King, Kraft Heinz, and Anheuser Busch and SABMiller.

Kraft Heinz is understood to have approached Unilever around a fortnight ago with an offer that would see shareholders receive $50 a share in a  mix of $30.24 in cash and 0.22 shares in the enlarged business.

Analysts at Barclays highlighted  that the offer would be at a 15.2 multiple of future earnings and said that there were “strong grounds to state that the offer undervalues the company.

Anheuser Busch’s takeover of beer rival SABMiller was done at a 20.9 times earnings while Reckitt Benckiser’s current deal with Mead Johnson has been agreed at 19 times earnings, Andrew Lazar at Barclays said.

“This is cheap money meeting industrial logic”, said fund manager Steve Clayton  at Hargreaves Lansdown.

“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.”

However Mr Clayton agreed that Kraft would have to significantly sweeten its offer: “The long term boost to portfolios that Unilever has delivered has been enormous.

Kraft and Heinz combined in a deal in 2015

A short term premium today is no compensation for losing the growth that Unilever could produce for decades to come.”

Company insiders argued that the low-ball offer “deserved to be forgotten” and stressed that a deal would mean a clash between Unilever’s long-term approach to shareholder returns and 3G’s short-term private equity model.

Industry experts also highlighted the difference between Unilever’s chief executive Paul Polman’s commitment to corporate social responsibility versus 3G’s ruthless approach to costs, which has seen them slash jobs, factories and squeeze employee spending on everything from hotels to paperclips.

“I struggle to think of two companies that are more polar opposites”, one said.    Sources also accused the US rival of an opportunistic approach which would use Unilever’s strong balance sheet to finance its own take­over.

By contrast, Kraft Heinz has a credit rating that is five notches below Unilever’s and one notch above junk due to its highly leveraged approach to dealmaking.

The ambitious deal approach follows speculation that consumer goods companies would look to consolidate to help weather a tougher climate.

The takeover approach comes a day after Kraft Heinz reported a slip in fourth-quarter sales which has led some analysts to suggest that the cost-cutting approach to driving profits was already dampening growth.

However, last month Unilever also warned of a “slow start” to the year  as it battled volatile currencies and tough conditions in Latin America.

David Palmer at RBC said that Unilever was an attractive  for Kraft because it would broaden its  exposure to  emerging markets and in the personal care market where Unilever owns Tresemme hair products, Lynx deodorant and Vaseline.

Lazard is advising Kraft Heinz while Unilever is using a roster of advisers from Centerview, Morgan Stanley, UBS and Deutsche Bank.