Why Kraft Heinz dropped Unilever bid
Consumer products group Kraft Heinz has abandoned its $143bn takeover of competitor Unilever. The FT's Rob Armstrong and Jonathan Guthrie discuss the likely reasons.
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Kraft Heinz has dropped its pursuit of consumer product rival Unilever, only two days after publicly confirming its interest. Here to discuss these developments is Jonathan Guthrie, head of the Lex Column. Jonathan, was this nascent deal scuppered because of business or politics?
I think it was scuppered because of politics. That's my guess. We don't know that for sure. I suspect that might not be a bad thing for business, because it would have been a very, very leveraged deal.
Essentially, Kraft Heinz would have taken on so much debt that it would have teetered on.
I think it would have teetered It would have needed to find some very big cost savings. We calculated it on Lex at about 3 billion recurring. And one of the things you have to remember is that Unilever shareholders would have taken payment partly and cash partly in shares. The real sustainability of the shares they would have received and the new greatly enlarged group is something that would have been questionable, I believe.
I'm glad you talk about sustainability. Because it seems to me, that if anybody has shown that they can achieve cost savings, it's the 3G group, the owner of Kraft and Heinz. They've taken a huge amount of money, a cost I should say, out of both of those businesses. So it seems like, to me, they could probably come up with their $3 billion. The question is, how long does the business that remains last?
You know, exactly, and what kind of business it is. And I think that is the place where politics and business collide fairly catastrophic for Kraft Heinz. The cost savings they achieved before were within US companies that had bought other US companies.
Here they were trying to do something cross-border. And my suspicion is that when they went to the British government over the weekend, politicians simply said, out with this. We will not put. Kraft's name, I have to say, is pretty toxic in UK political circles after they bought Cadbury and went back on a promise to keep open a plant near Bristol. And when moreover, the chief executive of that time declined to go before a select committee and instead, sent some slick US lawyers instead.
I mean, as you know, I'm more or less of an American libertarian and I feel like people should be able to buy whatever they want. But it does raise an interesting question, where you have one of the acquiring companies having already gone back on its publicly given word. That would seem to give the politicians more licence to push back.
And I think this time they are ready. Because last time with Cadbury that really only started to roll as a public issue, quite a long way into the takeover discussion. And it was really triggered by a piece in the Financial Times that came about, because I was with Lord Mandelson, who was the industry minister at the time, asked him whether he would be willing to step in. And he said, he might be.
And I think this time there's been a much more rapid reaction I suspect. And I'm more or less a UK libertarian, I would say. But to me, I think if you ignore these political dynamics, you're cruising for a bruising. Because we've seen with Pfizer and Astra, they tried to go at it as this world-bestriding multinational of the kind that neocons like Francis Fukuyama used to write about. And they just got stiff-armed away.
Let me ask you a question strictly on the business side now, which is about just the foods business. Just in recent weeks, Nestle has come out-- even last week, Nestle came out and said they were going to drop their growth target. Mighty Nestle, the great reinvestor in its own business, the great cultivator of long-term growth, is out there saying actually, it's hard for us even to hit our quite modest growth targets. And maybe the issue that we're looking at here is they processed foods just isn't a growth-- it's a stagnant business now.
So 3G group and Kraft Heinz doesn't do what they do to its next target, the next target is going to have to do it to itself. In other words, Unilever is just a stagnant business. And it needs to get serious about taking costs out.
That I think is probably the right point to make, which is that Unilever should be trying to raise its margins. Its a different kind of business to Reckitt Benckiser in some respects. In other aspects, it's very similar, because its a mixture. And you have to remember that Unilever has a lot of activity that's around cleaning products, toiletries, and so forth, not just food.
And Reckitts has a very much higher margin. And is a darling of stock market investors, much more aggressive internal culture I think. And I think Unilever will have a look at that. The bigger question, if you step back for a moment, is over growth generally and whether we are entering an era, economic era of much slower growth when gains by businesses often will come from consolidation, often against the tide of populist politics.
I will end our conversation on that dystopian note, Jonathan. Thanks very much.