Kraft Heinz (KHC) has announced it has made a “comprehensive” proposal to Unilever (ULVR) to combine the two groups, which the UK-listed firm has rejected. Here’s how leading City analysts have reacted to the news.
Analysts at Liberum said while Unilever had declined the proposal, “we note Kraft Heinz’s backers 3G Capital and Warren Buffet’s Berkshire Hathaway have a history of undertaking significant industrial combinations. At this point, we are placing our ratings and target prices for Unilever NV and plc shares under review until further details are forthcoming.”
Macquarie said: ”We are surprised by Kraft Heinz’s interest, since the company’s track record has been to pursue deals within the Packaged Food category (and speculation (reported widely on Bloomberg) has consistently referenced its potential interest in other US packaged food companies), rather than to diversify into adjacent categories, namely HPC.That said, there are significant manufacturing and distribution overlaps across Food & HPC and, of course, Unilever itself clearly sees operational benefits from running a combined Food & HPC business.
”An approach for Unilever is a sure sign of the surge in dollar buying power and the decline in sterling”
“It is noteworthy that margins at Heinz increased from ~18% to ~26% in 12-18 months following its acquisition by 3G. Likewise, the initial target synergies from the combination of Kraft and Heinz was 5% of COMBINED sales, so presumably part of the attraction of a combination would be the considerable cost savings opportunity (Unilever’s core operating margin was 15.3% in 2016 and a central part of our Buy thesis is that the company has significant scope to over-deliver on its margin expansion plans).
”At a glance, from a regulatory perspective, the business overlap would probably be limited to Unilever’s Foods business (24% of sales and 28% of operating profit), which we think is split 45% savory (Knorr etc), 24% spreads (Flora etc), 26% Dressings (Hellmann’s etc) and 5% other. Anti-trust issues would likely be highest in the condiments and cooking aids categories.
Paul Hickman, analyst at Edison Investment Research, said: “Kraft Heinz’s approach demonstrates the pressure on brand owners to consolidate in the face of international pressure on margins and constraints to organic growth opportunities. With about 70% of revenue from Europe and Asia, Unilever’s markets are complimentary to Kraft Heinz, which has around 70% in the US. Inevitably, Kraft Heinz will not have led with its best offer and a protracted negotiation probably lies ahead.”
Neil Shan, also of Edison Investment Research, said: “Before biting off Heinz, Kraft’s last big chomp for a historic name in food was for Cadbury in 2010. An approach for Unilever is a sure sign of the surge in dollar buying power and the decline in Sterling. Today’s 10% rise in Unilever’s share price means this is cash neutral for a US purchaser compared with if it had approached seven months ago. Unilever’s own share price is also down about 15% from its all time highs since the UK referendum vote last summer, on concerns about its pace of global sales growth, so the timing of Kraft Heinz’s bid is opportune. Kraft Heinz will look to justify a bid value of Unilever based on its average price over the last three months, which has been over sold and does not reflect the inherent value of long-term cashflows built into Unilever’s model. Kraft, which had already been demerged from Mondelez snacks arm, is now looking to create a behemoth in the entire food supply chain from ingredients to products on the shop shelf along with access to all of Unilever’s other FMCG world leading consumer brands.”
Analysts at Jeffries said: 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.
“KHC is a 100% Foods company with 75% of sales in the US. ULVR is a diversified Foods & HPC business where recent capital allocation has favoured HPC. So a more logical and financeable move would be for KHC to acquire ULVR’s Foods Business, which has sales of €12.5bn and EBITDA of €2.5bn. Acquiring ULVR Foods for cash at 12x EBITDA would put KHC on post deal net debt:EBITDA of c.5x. We think competitive conflicts in Foods in the US would be limited to elements of Knorr (ULVR) & Heinz, Hellman’s (ULVR) & Miracle Whip (KHC).
”To say this approach is a surprise is an understatement. It has been obvious for a while that the broader 3G/ABI/KHC axis sees itself as an ambitious game-changer in the consumer industry based on a radically different perception of cost and margin. If ULVR loses its independence, it will have cause to reflect on what might have proved to be a too little, too late response to the market’s demands for margin improvement and better cash generation. But we expect ULVR’s board to demonstrate a keen appreciation of its value.”
Raphael Moreau, food analyst at Euromonitor International, said: “Although there was little incentive for Unilever to accept this initial merger offer, Kraft Heinz and 3G Capital’s willingness to pursue a deal could ultimately encourage Unilever to seek a deal to offload some of its food brands, to which Kraft Heinz would seek to apply aggressive cost reductions. While creating synergies in sauces and soups could be a rational for such a deal, a combination of Heinz and Hellmann in mayonnaise could struggle to be given approval by competition authorities. Its search for a mega-merger could see 3G Capital settle for a smaller deal under which group synergies would be more achievable.”
Ernesto Bisagno, Vice President – Senior Analyst at Moody’s and lead analyst for Unilever, said:“Whilst it is still early days, Kraft Heinz’s offer for Unilever’s shares would be credit negative for Unilever’s bondholders, as 2017 pro-forma combined leverage would likely rise significantly - excluding cost savings and synergies - from the moderate 2.0x Unilever currently shows on a standalone basis. Also, Kraft Heinz’s current rating is Baa3 and thus five notches lower than Unilever’s A1 rating.”
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