On the face of it, it’s a staggering deal. Unilever has confirmed that it has rejected an offer worth in excess of £100 billion to merge with Kraft Heinz.
But on closer investigation, a combination between the two businesses – giants of consumer goods in their own right – would make perfect strategic sense.
Based on pro-forma net sales of $26.5 billion in 2016, almost 80% of Kraft Heinz’s business – or $21 billion – came from the US and Canada. Despite having one of the most iconic food brands in Heinz and an American favourite in Kraft cheese, the company has never charted particularly well in Europe. Add to this the fact that it made just 12% of its sales from the ‘rest of the world’ last year – that is to say countries outside of Europe, the US and Canada – then it quickly becomes obvious why Kraft Heinz might seek to instigate a merger.
In stark contrast, Unilever made just shy of one-third of its 2016 turnover from the Americas, which includes South America and Central America as well as the US and Canada. North America accounted for €9.1 billion of that.
With revenue totalling €52.7 billion, the Anglo-Dutch company made €22.4 billion across the whole of Africa, the Middle East and Asia, as well as Turkey and the RUB countries, which comprises Russia along with neighbours Ukraine and Belarus.
Its performance in Europe included turnover of €13.2 billion – lower perhaps than to be expected – plus nominal underlying volume growth.
The results make Kraft Heinz less than half the size of Unilever, which enjoys stronger reach in Europe, the Middle East and Asia.
For the Chicago-based company, which was likely prepared for a second bid in the first place, the complementary geographies are attractive ones.
Paul Hickman, analyst at Edison Investment Research, said: “Kraft Heinz’s approach demonstrates the pressure on brand owners to consolidate in the face of international pressure on margins and constraints to organic growth opportunities. With about 70% of revenue from Europe and Asia, Unilever’s markets are complimentary to Kraft Heinz, which has around 70% in the US. Inevitably, Kraft Heinz will not have led with its best offer and a protracted negotiation probably lies ahead.”
If the proposed merger was to go ahead, the combined business would be the second largest food company in the world.
Only Nestlé, which this week reported net sales of $89.3 billion, would be bigger.
It has the potential to be a merger between ketchup and mayonnaise.
The size of the transaction will inevitably lead to concerns from anti-trust regulators, and the two businesses may be faced with the difficult task of selling off its brands.
When Anheuser-Busch agreed a $106 billion deal for SABMiller, the two parties were forced in to a piecemeal divestment of parts of their combined businesses – including, most notably, the sale of premium beer brands Grolsch and Peroni to Japanese brewer Asahi.
Selling off brands might hit Unilever harder: retaining its personal care and consumer products brands would be unconducive to Kraft Heinz’s main aim.
Unilever operates a number of non-food brands including Domestos, Surf, Dove and Lux.
P&G – the $65-billion company behind Always, Gillette and Oral-B – would surely be a likely suitor. Reckitt Benckiser, the maker of Durex and Dettol, agreed to acquire infant formula manufacturer Mead Johnson for $17.9 billion earlier this month, in a move that it would significantly enhance its performance in Asia.
But with personal care and home care contributing 4.2% and 4.9% growth respectively, it remains to be seen whether Unilever would be willing to part with this side of its business.
In fact, the two categories are the best-performing of any of Unilever’s business areas, and between them are growing at a rate more than four times higher than food.
That makes the prospect of a ‘a protracted negotiation’ even more plausible, and suggests that any agreement could come with an inflated price.
Raphael Moreau, food analyst for Euromonitor International, thinks that a scaled-down version of the deal could well go ahead.
Moreau said: “Although there was little incentive for Unilever to accept this initial merger offer, Kraft Heinz and its investment vehicle 3G Capital’s willingness to pursue a deal could ultimately encourage Unilever to seek to offload some of its food brands, to which Kraft Heinz would seek to apply aggressive cost reductions. While creating synergies in sauces and soups could be a rational for such a deal, a combination of Heinz and Hellmann’s in mayonnaise could struggle to be given approval by competition authorities. Its search for a mega-merger could see 3G Capital and Kraft Heinz settle for a smaller deal under which group synergies would be more achievable.”
© FoodBev Media Ltd 2017