Think of Kraft Heinz’s assault on Unilever as a slap in the face for management. It was short-lived, shocking, and will smart for a good while yet.
It’s a slap that says “we think we can do a better job for your shareholders than you”. That is not a message you want to get lodged in shareholders minds if you are Unilever’s management and today the company acknowledged the sting.
“Unilever is conducting a comprehensive review of options available to accelerate delivery of value for the benefit of our shareholders. The events of the last week have highlighted the need to capture more quickly the value we see in Unilever.”
That is the sound of a company cheek smarting.
It is very rare for corporate raiders like Warren Buffett (24% owner of Kraft Heinz) and Brazilian financier Jorge Lemann (owner of 3G) to back off so quickly. Once you dangle higher returns in front of pragmatic investors, they usually want to see what the next chat up line might be.
The Unilever management will take some pride in the fact they convinced some of their own major shareholders to back their rejection of the offer so flatly. The management argument, as told to me by senior management, went something like this.
Yes – Kraft has much higher profit margins than Unilever (23% compared to 15%) so looks like the better operator. But – Kraft habitually invests less in the future, therefore has lower organic (internally generated) growth and is saddled with more than average amounts of debt.
As a result it needs to acquire other companies to keep the growth going and pays for it by using yet more debt, which is financed in part with cash the target company has in the bank.
That model, argues Unilever, is not sustainable. Before long, we would be part of an underinvested, short-term profit-seeking, company-eating machine. As soon as Unilever had been digested, Kraft would be hungry again.
When the management of the company you want to buy REALLY don’t want to sell to you, you can always go over their heads, cut them out of the negotiation and appeal directly to the shareholders.
But “going hostile” costs a lot more money and excites much more regulatory and political interest than a deal which the management recommends.
Many UK politicians welcomed the Kraft defeat as a victory for responsible long-term thinking by one of Europe’s biggest companies and its shareholders who wisely eschewed the Jerry Maguire “show me the money” approach.
It’s lucky for them they did. It will give the government a bit more time to figure out their own play book for how to deal with future bids – which are certainly coming thanks to the discount UK companies are selling at thanks to a near 20% depreciation in sterling post-referendum.
At the World Economic Forum in Davos last month, I spoke to half a dozen US executives who were running the rule over potential UK targets – big and small.
Current rules only allow the government to intervene when takeovers could compromise financial stability, national security or media plurality.
Targets I heard discussed included food and drink, engineering and technology companies based or listed in the UK with foreign earnings potential. You can come up with a reasonably long list using those criteria.
Despite a few eye-catching deals like Japan’s Softbank swoop on ARM Holdings and the upstart company Skyscanner being sold to a Chinese rival, there is no flood yet.
In fact, merger activity overall is still subdued as bidders are still wary of the prospects for UK companies with exposure to domestic and EU markets until greater clarity emerges on the future relationship between the two.
As Kraft Heinz retreats with its tail between its legs for now there is plenty of food for thought for both Unilever and government.
Unilever’s CEO Paul Polman has been warned that if he doesn’t focus more on the bottom line, someone else will.
The government may have to decide quickly whether foreign takeovers are a sign of confidence in the UK to be welcomed or opportunistic raiding parties to be resisted.