On February 20, Kraft Heinz Co. decided to withdraw its $143-billion-dollar buyout bid for Unilever PLC. The decision to drop the bid came only 2 days after the deal was made public, and Kraft attributed the decision to the hostile reaction that the deal unexpectedly generated.
During the weeks preceding the deal, investors largely expected Kraft Heinz to start targeting other food distribution firms for acquisition. The company’s current name and conglomeration was initiated when Berkshire Hathaway (Warren Buffet’s company) and 3G Capital, a Brazilian private equity firm, supported the company’s merger in 2015. This came only after the pair purchased control of Heinz Ketchup Co. in 2013.
In recent years, food processors have struggled to maintain sales against the trend of greater demand for healthier options among younger generations of Americans, so mergers and acquisitions have been commonplace in the market because companies are seeking alternative measures to boost revenues. Furthermore, 3G is particularly notorious for purchasing large companies, slashing the costs of production to maximize their profit, and then looking to further increase revenue by acquiring other companies. The firm previously made headlines when it purchased both Burger King and Tim Hortons to form Restaurant Brands International in December of 2014.
Despite the expectation of a major purchase, investors were surprised by Kraft Heinz’s choice of Unilever. Unlike Kraft, Unilever provides many of its services to developing markets and derives most of its revenues from personal care products, and therefore overlaps little with Kraft’s operations in well-established markets like the US. Because its operations had little overlap, it is unlikely Kraft Heinz could have saved much money by integrating their operations.
The deal was particularly interesting because Unilever is a Dutch company that maintains headquarters in London. According to Reuters, Buffet and 3G felt confident they could build off of their previous success in purchasing British-based Anheuser Busch last year, but were thrown off by the nation’s hostile reaction to the takeover, which was largely due to the lingering economic uncertainty caused by Brexit. Recently, Prime Minister Theresa May announced plans for the nation to become more proactive against foreign takeovers, and this sentiment eventually led Kraft to withdraw their bid.
While news of the pending deal had sent both stocks surging upward, the news of the deal’s failure reversed many of the gains. According to the Wall Street Journal, analysts believe the attempted takeover will serve as an alarm for Unilever, which lags well behind its competitors in terms of profit margins. Also, investors with 3G are reportedly hungry for another deal, as revenues are beginning to flat line after cost cutting measures from the 2015 merger are wearing off. Analysts appear to agree that these investors’ preferred choice is Mondolez International group, which was formerly a part of Kraft prior to being sold during the merger with Heinz. Mondolez, however, has not issued any statement on the speculation of such a deal, and at this point any interest on Kraft’s behalf remains a rumor.
Kraft’s attempted deal is the third largest takeover bid to ever fail, and it marks a recent trend of ambitious acquisitions failing to be executed. However, analysts note that the market has not treated these failures too harshly, and they expect companies to continue attempts at controversial mergers until the market begins punishing them more severely for their failures.