This morning’s news that Kraft Heinz, the world’s 5th biggest consumer foods brand is looking to acquire Unilever (LON:ULVR) the world’s 3rd biggest consumer food brand has seen the share price of both companies surge.
While Unilever has rebuffed the approach a combined company would be huge in terms of the number of brands, not to mention pricing power.
The exact price isn’t yet known but it has been estimated to be in the region of £40 a share which would value the company in the region of over £100bn.
This deal is likely to prompt a Marmite response, with the markets love the idea given the share price reaction, there is a good chance that governments will hate it, and it is inevitable that competition authorities and regulators will want to have a look at it.
There will undoubtedly be competition concerns given how big any new company would be, and Kraft is already in the process of drilling down on costs as a result of its recent $100bn merger with Heinz in 2015. It aims to save $1.7bn annually by 2018.
In numbers released yesterday the company reported a rise in profits but it can’t disguise a decline in Q4 sales, not only in the US, but also in Europe which saw a decline of 13.3% year on year.
As it is the company is already well into a major cost cutting program as a result of its 2015 merger which was backed by 3G Capital and Berkshire Hathaway (NYSE:BRKa).
Unilever in its most recent trading update also attested to difficult trading conditions after seeing a 1% decline in revenues. Despite this profits were up despite difficult trading conditions in Brazil and India as the company focussed on its margins and keeping a rein on costs.
A merged company would be a huge undertaking and the amount of costs that could well get stripped out of any combined entity is bound to worry governments in countries where Unilever has a significant number of employees, like the UK and Holland.
Unilever’s brands, of which there are over 400 include Marmite, Dove soap, Ben and Jerry’s ice cream, Magnum, Hellmanns, Knorr, and its products are available in over 190 countrires
In the UK the company has research facilities in Colworth and Port Sunlight, as well as offices in China, India, the Netherlands and the US.
It is not hard to imagine that the weakness of the pound may have played a part in the reasons for this bid, but deals of this size rarely generate much in the way of value, and that’s before you look to price in any competition concerns.
If Kraft Heinz return with another bid and it is accepted we can expect to see significant push back on this given that there will certainly be significant jobs cuts and given competition concerns there is a good chance the deal may well get blocked.
UK authorities have already had experience of broken promises by Kraft in the Cadbury takeover a few years ago. It is hard to imagine that they will get duped again, and the politics of this may outweigh the commercials, particularly at a time when the UK government will want to safeguard as many jobs as possible.
"DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. "