What a weekend.
In less time than it takes two teenagers to go from moony-eyed courtship to the back of the bike sheds to bitter recrimination, the mooted tie-up between Kraft Heinz (NASDAQ: KHC) and Unilever (LSE: ULVR) is over.
Talk about a whirlwind romance! We only learned on Friday that the US giant Kraft Heinz had a crush on the Anglo-Dutch, erm, giant.
Unilever rebuffed the initial advances, but its shares soared anyway. After all, the bid was backed by Brazilian finance firm 3G Capital and Warren Buffett’s Berkshire Hathaway – the same team who merged Kraft and Heinz.
The weekend then saw media pundits speculate about how Kraft Heinz might garner Unilever’s affection (more money, basically) while analysts and fund managers got their pencils out and tried to decide how much they’d let their Unilever shares go for.
But by the end of Sunday the whole affair was finished. And the official announcement used language familiar to anyone who has ever ended a relationship like grown-ups:
“Unilever and Kraft Heinz hold each other in high regard. Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever.”
Let’s just be friends indeed.
Thanks but no thanks
A lot of people will be relieved this deal won’t happen.
The most relieved will probably be all those who’ve been saying for years that Unilever shares look expensive, only to see the shares soar when a potential US sugar daddy showed up. If Unilever had gone for maybe £50 a share – compared to £33 a share before the potential merger leaked – then grown men and women would have cried.
Happily, the shares fell after the deal was cancelled. Phew!
Which brings me to the second set of investors – I’m one – who will be relieved. We admire how Unilever is run but have been putting off buying more shares because, well, they look expensive. We’ve got another chance to overpay now, thanks to Kraft Heinz declining theirs.
Journalists will also be relieved. It is tedious enough writing ‘Kraft Heinz’ after those firms merged in 2015. Can you imagine typing out Kraft Heinz Unilever every time? Or Unilever Kraft Heinz for that matter – that’s equally a mouthful.
The name game brings me to Prime Minister Theresa May. I’m sure with Brexit looming, Mrs May is relieved she doesn’t have to step into a fight over the future of a great British company like Unilever.
Instead, the brash American invaders have been repulsed! God save the Queen! Hurrah for Blighty! Even if Unilever has got one leg in the Netherlands and a listing in Amsterdam!
Seriously, ordinary investors should be happy Unilever will remain independent. There aren’t many ways to bet on global growth through such high-quality operations – and to get a 3% dividend doing so.
In fact, outside of the Kraft Heinz war room, about the only people who will be sorry to see the deal flounder will be the speculators who had bought more shares and pushed up the price.
They’d have been hoping Kraft Heinz would have to shell out. Instead they’ve seen it cop out.
Still crazy after all these years
Despite all this relief, there’s one reason to be a bit concerned in the wake of this mini-saga.
You see, at £115 billion even before any improved offer, the bid would have been the second largest takeover in corporate history.
And mergers on this scale – in sectors that have been hot for years – have a terrible record:
- In 2000, US dotcom giant AOL bought media rival Time Warner for $164 billion. Just months later the bubble burst. The merged group reported a $99 BILLION loss in 2003 as it wrote down the deal.
- In 2007 RBS acquired Dutch rival ABN Ambro for £49 billion, which marked peak hubris for the UK banking industry. A year later RBS raised £12 billion in a rights issue, but even that wasn’t enough to stop it being bailed out by the British government.
- More recently, in 2012 commodity behemoths Glencore (LSE: GLEN) and Xstrata announced a $90 billion merger. With hindsight their loving embrace took place even as the mining sector began imploding – the sort of public display of affection in front of a volcano that you might see in a swashbuckling romance movie. By late 2015 people were speculating that indebted Glencore – and its plunging shares – might soon be near worthless.
All these deals were done at the height of popularity for a particular market ‘theme’ or story.
That peak enthusiasm – which can only be dated for sure in retrospect – seems to inspire both the company executives behind the dumb mega deals and also their bankers.
Star-crossed lovers
A Kraft Heinz/Unilever tie-up would have required many billions in financing, as well as bottomless confidence on the predator’s part that it could find huge cost savings to create value. Unilever’s shares were trading at over 20-times earnings when the bid leaked. That’s a very high hurdle.
If the takeover had gone through, it might have marked the high water point for both the era of cheap money that made such massive bids thinkable, and also for the pre-eminence of so-called ‘bond proxy’ companies like Unilever that made them desirable, at least to some.
True, like all jilted lovers, Kraft Heinz, 3G Capital and even Warren Buffett at Berkshire Hathaway must be licking their wounds. They can’t yet be told it was for the best.
But in time they might decide they dodged a bullet.
