Last week yet another monster merger deal was broached: Kraft Heinz proposed a $143 billion dollar deal to merge with the Euro-based good and consumer products company Unilever.
The business community got excited about the proposal: Kraft Heinz shares climbed 5.4% to $92 after the offer, while shares of Unilever jumped 10% to $46.97, according to CNBC.
However, just two days later, the Anglo-Dutch company declined the deal, saying in a statement that the offer “fundamentally undervalues” the company.
“Unilever rejected the proposal as it sees no merit, either financial or strategic, for Unilever's shareholders,” the statement read. “Unilever does not see the basis for any further discussions.”
After that public rejection, Unilever shares soared more than 9%.
Translation: Sweeten the offer, and we’ll talk.
The management of Kraft Heinz responded as would be expected.
“While Unilever has declined the proposal, we look forward to working to reach agreement on the terms of a transaction,” the company said in a news release. “[But] there can be no certainty that any further formal proposal will be made to the Board of Unilever or that an offer will be made at all.”
Hold onto the first thought in that statement, because the deal’s not off — not yet.
Where the money is
One of the issues is that unlike Kraft Heinz, Unilever is heavily invested in what analysts call the HPC business: “household personal care” products. The CNBC story quoted Pablo Zuanic, senior equity analyst at Susquehanna International Group, stating that if the deal is to happen, Unilever may have to spin off its HPC business, which includes such brands as Dove and Axe.
“We expect [Unilever] to divest or sell the household personal care business, otherwise the deal is not doable, based on the math,” Zuanic said. “Kraft Heinz ... their focus is to be a global powerhouse in food and beverage, not [in] HPC, so Unilever, on the food, which is what they will keep, is aligned with a global strategy.”
Of course, the backdrop to this mega-deal is the fact that the Kraft Heinz offer is backed by billionaire Warren Buffett, plus the Brazilian private equity firm 3G Capital. Just two years ago, H.J. Heinz, which is owned by Buffett’s Berkshire Hathaway and 3G, completed a $45 billion takeover of Kraft Foods.
It’s likely the Kraft Heinz-Unilever deal will be back on the table in another week or two, with a somewhat bigger bid and a divestiture of non-food brands by Unilever agreed upon in advance. That’s because there’s big, big money to be made closing these deals.
The investors benefit from a bump in stock prices, which have already started rising merely on the anticipation of a deal.
And these mergers trigger “corporate restructuring” — read, layoffs — that gets CFOs salivating like Pavlov’s dogs.
But most importantly, the financiers, bankers, lawyers, brokers, accounting firms — they all rake in a piece of the billions in equity that change hands when these deals are consummated.
The financial community realized decades ago that transactions, not investments, are where the money is. Why expend the time and resources analyzing some development project, with all the attendant risks, when you can simply skim multi-millions off the tops of a mega-merger, no matter what the outcome is?
Even better if the merger eventually goes south, because then all the parties re-assemble to re-structure another deal that divests or spins off pieces of the merged organization, and they all pocket more millions in new fees for doing that deal.
For consumers and for competitors, of course, these mega-mergers are bad news. Food companies are clever enough to maintain the illusion of competition on the supermarket shelves by focusing their marketing on their leading brands, as if each one is a separate entity.
But the creation of huge, dominant multi-national corporations with more leverage than half the membership of the United Nations is not something the public should be cheerleading.
Consider a similar deal in other industries. Would we all be okay with Exxon Mobil Shell-BP? With AT&T-Mobile Verizon? With Ford-Chrysler GM?
The so-called magic of the marketplace only works if three factors remain in play: transparency, ie, buyers understand what they’re buying; market access, ie, the barriers to entry are not prohibitive; and competition, ie, consumers have genuine choices among comparable brands, organizations and product lines.
Mega-mergers suppress all three of those factors, and unless you work on Wall Street, that’s not a good thing.
The opinions in this commentary are those of Dan Murphy, veteran journalist and commentator