Feb 24, 2019

How Unilever dodged a bullet

Felix Salmon, author of Edge
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Data: Yahoo! Finance; Chart: Harry Stevens/Axios

It was as bold and audacious as takeover bids get: In February 2017, Kraft Heinz bid $143 billion to buy Unilever in a cash-and-stock offer valued at $50 per share.

By the numbers: Kraft Heinz itself was only valued at $106 billion at the time, but it managed to put together a bid of 0.222 of its own shares, which were valued at more than $80 each, as well as $30.23 in cash, for each Unilever share.

  • The offer, which valued Unilever at an 18% premium to where it had been trading in a Brexit-depressed market, was greeted ecstatically by traders, who bid up stock in both companies as a result. But it was summarily rejected by Unilever, and Kraft formally withdrew its offer just three days later.

With the benefit of hindsight, Unilever was unambiguously correct to reject the Kraft Heinz bid.

  • Unilever stock continued to rise even after the bid was withdrawn, and the company has been worth significantly more than the $50 per share offer price for nearly all of the past two years. The company is today worth about $150 billion.
  • Meanwhile, Kraft Heinz shares have imploded to less than $35, giving the company a valuation of just $43 billion. If Unilever shareholders had found themselves owning 0.222 Kraft shares instead, they would have been very unhappy — not to mention the fact that they would have had to be making interest payments on a massively enlarged debt stock.

Kraft Heinz is operated by 3G Capital, a Brazilian company notorious for its cost-cutting. The company's playbook worked well, until it didn't. Profits go up in the short term when you cut costs, but 3G is very bad at investing in future growth. Instead, it tends to grow via acquisition, and that turns out to be hard when no one wants to be bought by you.

The bottom line: Cutting costs does nothing to improve brand value, as Unilever knew in 2017 and as Kraft Heinz has now discovered. Once brand value has been eroded (to the tune of roughly $15 billion, in the case of Kraft Heinz), it's extremely hard to recover.

Go deeper: Kraft Heinz stock implodes on gruesome earnings

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