Kraft Heinz vs Unilever: A humiliating US$143 billion tale of Buffett and rebuff, and a reptile called 3G
Kraft left with fresh Hellmann’s mayonnaise on its face, as Unilever dismisses US giant’s surprise US$143 billion offer out of hand
One day, some weeks ago, some adolescent, spotty-faced analyst in the shareholder group of Kraft Heinz had the bright idea of taking over Unilever. It was a bad day in the office.
Unilever has successfully been in business for over a century. It runs great brands like Dove, Magnum, Lipton, Marmite (love it or hate it), Hellmann’s mayonnaise and (two of my best mates) Ben & Jerry.
Its founder, William Lever, saw the need to reduce disease by manufacturing soap.
And like the great industrial-philanthropic English families of the time – Cadbury’s for example – he desired to do good for the workers who were making him rich.
Lever built Port Sunlight – a model village as Cadbury did with the Bournville Village. They were the Gates Foundation of the day to whom Warren Buffett has pledged a great inheritance. Unilever still practices the philosophy of pursuing sustainable business, beloved of long-term investors.
Enter the Wolf of Wall Street. In recent years Kraft, the maker of Oscar Meyer sausages, Heinz ketchup, and Cadbury’s chocolate has become exceedingly acquisitive. The main shareholders are Warren Buffett, admittedly not known for being a predator. His partner however is 3G, a most impressive yet reptilian private equity company run by Brazilian Jorge Paulo Lemann which epitomises avarice that Lever and Cadbury would have found anathema to their values.
They take a company, buy it with other people’s money (huge debt) and cut costs to the bone, ripping out profits to pay off the debt until it is a tiny shell – maybe just a brand name. Kraft’s style is to cut costs to drive short-term profits, which helps short-term punters trade the volatility.
It is unsurprising that Kraft also makes Kool-Aid. The only similarity between the two companies is that they both produce consumer goods. No thought of people who may have spent decades in the company, or that its profits support the local community or that its products are popular.
Don’t get me wrong – I have not turned into a weak-kneed, lily-livered liberal; at least yet. There is nothing wrong with making lots of dosh through acquisition to clear out the stock market forest of dead wood. But any ole’ fool can buy and asset strip a decent company in a dysfunctional world driven by historically cheap debt provided by the Bernanke/Yellen clique.
Kraft turned Heinz’s 57 varieties into 5.7. Cadbury folded after 150 years for a large amount of money. Kraft promised to not change anything to get the deal, then welched and closed the factories, leaving pensioners in Cadbury accommodation (including a relative) exposed to their mercy.
Worst of all they changed the addictive recipe of Cadbury chocolate (far superior to anything from Switzerland or Holland, sorry) so that it tastes like the American recipe, i.e. dirt.
They destroyed the company, the values it stood for; they kept the brand and destroyed the product. Kraft Heinz may have pushed up profits but unsurprisingly, sales are down.
The bid was an impressive US$143 billion despite the fact that Kraft boasts only half Unilever’s US$56bn in sales. That makes prices move fast.
Last Friday, Kraft Heinz rose 11 per cent, and Unilever 12 per cent even though Unilever immediately rebuffed the offer. That such a deal would be so advanced without having a quiet word with the target company is incompetent.
More painful to Kraft is that two days before the surprise announcement, option transaction volume was the most in six years. The news was not a surprise to everyone. Could the market have sensed the transaction? Did someone leak the news? Was there trading on that inside information? Who knew what, and when did they know it? Insider trading is of course a criminal offence, as is releasing price sensitive information through the wrong channels.
It is a matter of record that two Brazilians were sanctioned and fined for trading on the Heinz news when Kraft took it over. Once could be considered unfortunate, twice suggests hanky-panky. It looks like Deep Throat is still open
Kraft withdrew with its tail between its legs after offering Unilever a humiliating press release. I would hazard a guess that the respected Sage of Omaha, who is more European than American in these matters, saw that a protracted battle might damage his homespun reputation.
Kraft was humiliated by a missed bid, stained in reputation and may face a criminal investigation regarding allegations of misuse of price sensitive information. It was a really bad day in the office.
But at least 3G can drink to drown their sorrows – they own the ridiculously branded, Anheuser-Busch InBev SAB Miller, the largest beer company in the world.
Richard Harris is a veteran investment manager, banker, writer and broadcaster