Unilever (LON:ULVR) shares are enjoying their best day in 30 years as a sleepy FTSE 100 is enlivened by another bold play from Brazil’s acquisitive 3G Capital outfit, via its holding in Kraft Heinz Co (NASDAQ:KHC). Kraft says Unilever declined its offer. Investors in large consumer-facing groups did get an early warning of Friday’s news from reports over the last few months suggesting 3G’s M&A appetite was rising again, now that its $40bn 2015 merger, backed by Warren Buffet’s Berkshire Hathaway (NYSE:BRKa), has been digested.
The group has a penchant for mega deals amongst food and consumer goods companies, though Unilever seemed unlikely to be in the frame due to its hefty market capitalisation. With a market value that is the equivalent of almost $125bn at Thursday’s close, a takeover by 3G might end up being its costliest yet. And having financed a string of deals via debt during the depths of the low interest rate era with leverage, the recent turn higher by market rates in response to a newly-hawkish Fed, presents further disincentives among private equity buyers for big M&A. Of course though, an acquisition via a separately listed equity vehicle, Kraft, offers 3G more scope.
Kraft has on Friday afternoon stated that it will pursue a deal regardless of Unilever’s rejection. That adds a note of aggression if not ‘hostility’ to the game which might now unfold. The would-be acquirer characterising its initial approach as “comprehensive” also points to some determination to carry out a transaction. Unilever later confirmed that Kraft’s offer was worth £40.10 per share, equating to a premium of c.20.8% to Unilever’s closing price in London on Thursday. On the face of it alone, that doesn’t look particularly punchy. At around £51bn, it would also be less than the group’s trailing 12-month revenue.
There’s no scientific principle stating that less than 1 time annual sales is a low-ball offer, but investors would be quite likely to see such a bid as just that. More formally, the offer represents just 5.8 times Unilever’s ‘core earnings’ last year (earnings before interest and taxation). On an enterprise value/Ebitda basis, it barely scratches above 2 times. It would be unusual for a large consumer group operating healthily, which Unilever is, to be sold for such modest multiples.
Moreover, the Anglo-Dutch firm’s return on equity and operating margin were above the global average of the personal products industry at the end of its last financial year. The group’s leverage is starting to look punchy, but its cash generative abilities have meant that financing costs have seldom been a problem. All told, either talk around the offer price is incorrect, or if it is accurate, the price is an opening bid.
Unilever shareholders are, by the looks of things as I write, in an enviable position. A determined suitor will very likely stoke further speculation about an offer which in turn will bid the price of its target higher, whether or not a deal is eventually sealed, which is not guaranteed. And given that there are just a handful of global consumer groups of the size of Unilever, a counter offer, perhaps from another large consumer and personal care group can’t be ruled out. The opportunity represented by discounted sterling and euro valuations may after all be a relatively temporary one.
Should Unilever’s board dig in against a deal, the dual-listed nature of the group (which has become truly embedded in both its Dutch and British investor bases over a period of decades) presents potential hurdles for an acquirer. For instance, the group’s articles of association require a ‘supermajority’ vote on major decisions like M&A. That may provide Unilever’s largest investors (including top investor Norway’s Government Pension Fund) with the ammo to agitate for as much envelope pushing as possible before accepting an offer.
It’s worth keeping the thought that an agreement is not guaranteed front and centre. In fact, the likelihood of one is not predictable at this stage. However, Kraft is looking “forward to working to reach agreement on the terms of a transaction”, so for now, game on.
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