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Let the Food-Deal Frenzy Begin

Let the Food-Deal Frenzy Begin

Postby smix » Sat Feb 18, 2017 9:30 pm

Let the Food-Deal Frenzy Begin
Bloomberg News

URL: https://www.bloomberg.com/gadfly/articl ... r-campbell
Category: Business
Published: February 17, 2017

Description: Packaged-food investors, you're out of luck ... for now. Speculation about 3G Capital's next target has been bubbling since the private equity firm orchestrated the merger of Kraft Foods Group Inc. and H.J. Heinz in 2015. We finally know what it's chosen: Unilever on Friday confirmed Kraft Heinz Co. had offered $143 billion to acquire the European consumer goods giant. It's an unusual choice: Unilever makes some grocery-store staples like Lipton tea that jibe with Kraft Heinz's products, but the bulk of its revenue comes from home and personal-care offerings. Investors were caught off guard (even though Gadfly's Tara Lachapelle tried to warn them). Shares of Mondelez International Inc., General Mills Inc., Kellogg Co. and Campbell Soup Co. fell on Friday, adding to declines they sustained on Thursday amid reports that 3G was looking beyond packaged food for its next target.
No Deal For You
Shares of packaged goods companies that had been speculated as potential 3G targets tumbled on news the private equity firm was going in a different direction. The buyout firm's typical playbook has been to target companies with weak margins and then slash costs like crazy to boost profitability. But even a cost-cutter extraordinaire like 3G needs to eventually find revenue growth. Sale gains at Unilever's personal-care business slowed in the most recent quarter, but that industry is certainly growing faster than the staid cereal and sandwich-spreads markets. The bid may fail. Unilever has rejected Kraft Heinz's offer and at least one analyst is bashing the idea, calling it a "sloppy" combination with questionable logic. There may also be antitrust pushback. But it's hard to see 3G going back to hunting for slow-growth food brands after this. It clearly has its eyes on a different sort of prize. That should be a wake-up call for packaged-food investors who may have been hoping for salvation via 3G and Warren Buffett, the firm's dealmaking billionaire sidekick. Would-be 3G targets Kellogg, Mondelez, Campbell Soup and General Mills have all implemented some form of zero-based budgeting -- one of the buyout firm's favorite tools whereby every expense has to be justified each year -- as well as other productivity self-help efforts such as shedding lower-margin and non-core assets. Kellogg is targeting an operating margin of nearly 18 percent by 2018, while Mondelez is aiming to cut $3 billion in costs. Campbell on Friday upsized its cost-savings target to $450 million by fiscal 2020, while General Mills says its on track to drive down expenses by $880 million with its margin-management and efficiency plans.
Simply the Best
Kraft Heinz's operating margin is best-in-class thanks to 3G Capital's cost focus. In some ways, that may have made the companies less attractive to 3G because there's less fat to trim, but it hasn't done much to help their stock prices. What they need -- like Kraft Heinz -- is growth, and their efforts there are falling flat. Campbell bet big on fresher foods with the acquisitions of Plum Organics, Garden Fresh and Bolthouse Farms, for which it paid $1.55 billion in 2012. But it's not easy for companies with histories in canned goods to veer into fresher foods, and Campbell said on Friday that its C-Fresh division won't grow this fiscal year. Also on Friday, General Mills, another company whose healthier-foods acquisitions haven't really done the trick, had to cut its 2017 forecaUnilever Remains Cool to Kraft Heinz Takeover Bid Despite Rallysts because of challenges in the yogurt and soup evironment. These companies might be better off trying to mimic the 3G model: merge with other packaged goods companies in order to cut costs even further. Should their own growth efforts fail, don't be surprised if more activists start showing up, seeking to shake up management teams or lean on packaged-goods companies to change their strategies. With Nelson Peltz's Trian Fund Management LP and Bill Ackman's Pershing Square Capital Management LP already on its shareholder roster, Oreo-maker Mondelez may feel the pressure more than others. More clarity on the structure of Hershey Co.'s controlling trust could empower Mondelez to revive deal talks. A combination of General Mills and Nestle SA is another oft-speculated transaction that might finally have a catalyst, especially if Nestle's European counterpart Unilever gets acquired. Campbell and Kellogg, both of which have large family or trust owners, could maintain that dynamic by combining with each other. Whatever the iterations wind up being, more food deals are -- and should be -- coming.



Kraft and Unilever's Big Food Fight
Bloomberg News

URL: https://www.bloomberg.com/gadfly/articl ... food-fight
Category: Business
Published: February 17, 2017

Description: Unilever may have a fight on its hands to stay independent in the face of a pursuit by U.S. food giant Kraft Heinz Co. The Anglo-Dutch consumer goods group has rebutted an initial $143 billion cash-and-shares proposal. It sounds big but it's a low-ball offer that's easy to swat away. If Kraft comes back with more, Unilever will need to serve up with some clever ideas to stay independent. Size is no defense. Unilever was valued at 101 billion pounds ($125 billion) prior to Kraft's interest leaking. But it is trapped in some awkward trends. Even though it is an international stock denominated in sterling, the shares have under-performed the FTSE 100 over the past year. Recently it has fallen victim to the sell-off in plodding defensive stocks as investors have sought racier growth stories. For Kraft, the attraction is the chance to grab an asset that provides a great platform for what it does best: rip out cost by integrating businesses or staging a break-up. The U.S. group has fattened margins considerably over the past three years and more progress is expected.
Outpacing Unilever
Operating margin has grown faster at Kraft Heinz than at Unilever. The approach was at $50 a share, with $30.23 in cash and the rest in stock. That's roughly a 20 percent premium over Unilever's closing share price on Thursday and 25 percent above its three-month average. It's clearly just an opening shot and Unilever is right to reject it outright. To have a chance of success, Kraft will need to offer more value and perhaps more cash. The share component of the initial proposal is a big problem. Kraft is 100 percent food, while Unilever is 60 percent consumer goods and household products. There are no synergies between Dove and ketchup. Maybe there's a partner involved to take the non-food piece.
Personal Care
The division is Unilever's biggest generator of revenue and operating income. What's more, as Gadfly has noted, Kraft has a mixed record at sustaining sales growth in its acquisitions. To grow, it needsto keep doing M&A. All told, Unilever investors would be switching into a very different investment story. How much cash can Kraft put into the mix? It looks like it wants to gear up Unilever's balance sheet, effectively paying the cash back to the target's own shareholders. Spreads on 10-year Unilever debt widened 40 basis points on the news. Maybe Kraft's friend Warren Buffett can help by providing some equity. But he'll be mindful of his own returns. That could limit how much equity he would contribute.
Unilever's Reach
Africa and Asia account for the largest part of the company's revenue and operating income. If Kraft can't put any more cash in, the risk is that its own share price falls as it tries to use more shares. For now, the market is helpfully cheering it on. Paul Polman spends a lot of time outside Unilever talking about saving the planet. He may now need to save his job. It shouldn't be too hard. He has options. He could gear up Unilever himself. He could cut costs. He could sell the spreads business. Hey, he could even do a big break up of the group between personal care and food. Time to get to work.



Unilever Remains Cool to Kraft Heinz Takeover Bid Despite Rally
Bloomberg News

URL: https://www.bloomberg.com/news/articles ... pite-rally
Category: Business
Published: February 17, 2017

Description: As the clock ticks toward a takeover deadline, Kraft Heinz Co. faces an uphill battle getting Unilever to negotiate. Publicly, the company has decried Kraft’s $143 billion buyout offer as lacking merit and said there was no basis for further talks. Behind the scenes, Unilever executives have fretted over Kraft’s penchant for slashing costs and lack of vision for cultivating brands, according to people familiar with the situation. Kraft also lacks experience managing home and personal-care businesses, which account for about 60 percent of Unilever’s revenue, they said. While both companies sell food, Unilever has pursued higher-end brands, such as Ben & Jerry’s ice cream and Talenti gelato. Kraft, meanwhile, sells Velveeta and Jell-O. “If I was Unilever, I would fight this with hand and fist,” said Erich Joachimsthaler, a branding expert who runs the Vivaldi consulting firm. “It would crush everything we celebrate about Unilever.” Though Unilever publicly rejected the $50-a-share bid on Friday, Kraft has said it’s still pursuing a deal. The prospect of both reaching an agreement sent shares of Unilever soaring 13 percent to a record high. The Anglo-Dutch company, which makes Hellmann’s mayonnaise and Dove soap, is now valued at more than 114 billion pounds ($142 billion). The rally makes it more likely that Kraft will increase its offer, a person with knowledge of the bidder’s deliberations. Shares of Kraft also jumped on the news, climbing 11 percent to $96.65. That values the food giant at $117.6 billion. An acquisition of Unilever would depend on financing from Kraft’s largest investor, Berkshire Hathaway Inc., a separate person familiar with the situation said. Against that backdrop, Unilever is trying to convince investors that a deal wouldn’t make sense. The company has been speaking to shareholders about why it should remain a stand-alone business, arguing that there aren’t many synergies between the two entities, said people with knowledge of the matter.
Surprise Offer
The unsolicited approach from Kraft took Unilever by surprise, they said. Executives didn’t expect an offer from Kraft because they see the companies as too different, according to the people. Unilever has less of a focus on food, and it’s spent recent years acquiring upstart brands that appeal to millennials. That includes Dollar Shave Club and Seventh Generation. At issue is whether Unilever’s diverse investor base will see Kraft as a strategic fit. BlackRock Inc. is its largest shareholder, with a roughly 8 percent stake. Under U.K. takeover rules, Kraft has just under a month to make a firm bid -- or else it has to walk away for six months. Kraft’s overture follows a 17 percent slump in the pound against the dollar since Britain voted to leave the European Union, along with Unilever’s worst annual stock performance since the financial crisis in 2008. The shares fell 2.5 percent over the course of 2016, though European rival Nestle fared only marginally better, losing 2 percent in the same 12 months.
Beer Merger
The investors behind 3G Capital, the private equity firm that runs Kraft, succeeded last year in orchestrating Anheuser-Busch InBev SA’s purchase of SABMiller Plc for about $123 billion. In that case, they had support from a large SABMiller shareholder, Altria Group Inc. The proposal by Kraft, which has dual headquarters in Chicago and Pittsburgh, was about two-thirds in cash and one third in new stock. It’s possible that a new offer could just be for Unilever’s food interests, according to Jefferies & Co. That would enable Unilever to continue operating its mainstay household and consumer-goods brands. Unilever also could try to find a white-knight suitor that it sees as more compatible, according to Stifel Financial Corp. analyst Mark Astrachan. That may include companies such as Colgate-Palmolive Co. or Kimberly-Clark Corp., he said in a report.
Consolidation Pressure
Large consumer-goods companies, facing slowing sales around the world, are increasingly under pressure to merge. Kraft Heinz itself was forged in a $55 billion combination orchestrated by 3G and Berkshire Hathaway, which is run by Warren Buffett. The two investors had previously teamed up two years earlier on a buyout of H.J. Heinz. There had been speculation that 3G would look to buy another food company and resume a cost-cutting cycle spearheaded by Kraft Chief Executive Officer Bernardo Hees. Mondelez International Inc., General Mills Inc. and Kellogg Co. had been mentioned as potential targets. “Kraft Heinz’s approach demonstrates the pressure on brand owners to consolidate in the face of international pressure on margins,” said Paul Hickman, an analyst at Edison Investment Research. Kraft’s bid represented an 18 percent premium to Unilever’s closing share price on Thursday. The valuation would imply multiples of three times sales and 21 times earnings, “which strikes us as very low,” according to analysts at Berenberg. Combined, Kraft and Unilever would have had sales of $84.8 billion last year. That would have ranked them second among food and beverage companies, trailing Nestle SA’s $91.2 billion, according to data compiled by Bloomberg. Among food and beverage transactions, a deal for Unilever would surpass last year’s purchase of SABMiller, as well as InBev’s earlier acquisition of Anheuser-Busch Cos. in 2008 and the 2015 transaction that created Kraft Heinz, according to data compiled by Bloomberg.
Brazilian Investors
The investors behind the Unilever bid worked on all those deals as well. 3G -- founded by Brazilian executives Jorge Paulo Lemann, Marcel Telles, Carlos Alberto Sicupira, Roberto Thompson and Alex Behring -- has engineered a series of huge transactions in the food and drink industries. Their approach is to acquire companies, install new managers and slash expenses. 3G also acquired Burger King Worldwide Inc. and merged it in 2014 with Canadian doughnut chain Tim Hortons Inc. Many Unilever investors may be waiting for the big payday that a takeover would bring. Even as Unilever balks at any kind of deal with Kraft, the company could ultimately cave if the terms are sweetened enough, Stifel’s Astrachan said. “Unilever could angle for a higher price,” he said.



Kraft Heinz Spurned in $143 Billion Unilever Takeover Bid
Bloomberg News

URL: https://www.bloomberg.com/news/articles ... ombination
Category: Business
Published: February 17, 2017

Description: Kraft Heinz Co. made a $143 billion offer for Unilever in what would be the largest-ever takeover in the food or beverage industry, opening a campaign to create a consumer-goods giant with household names from Dove soap to Heinz ketchup. Unilever said Friday it rejected the $50 a share proposal, comprising about two-thirds in cash and a third in new stock. The approach “fundamentally undervalues” the company, Unilever said, adding that it doesn’t see a basis for further discussions. Kraft Heinz said earlier it would seek to gain an agreement on the terms of a transaction. Unilever shares surged 13 percent to a record in London, valuing the maker of Hellmann’s mayonnaise at more than 114 billion pounds ($142 billion). The Anglo-Dutch company’s stock gained 13 percent in Amsterdam, while Kraft Heinz rallied more than 7 percent in New York at 11:40 a.m. local time. Under U.K. takeover rules, Kraft Heinz has a month to make a firm bid -- or else it would have to walk away for six months. The bid underscores consolidation among consumer-goods companies searching for profit-growth strategies as conditions become tougher across the globe. Kraft Heinz itself was forged in a $55 billion combination orchestrated by Warren Buffett’s Berkshire Hathaway Inc. and Brazilian investment firm 3G Capital, which had teamed up two years earlier on a buyout of H.J. Heinz. There had been speculation that 3G would look to buy another food company and resume a cost-cutting cycle spearheaded by Chief Executive Officer Bernardo Hees. Mondelez International Inc., General Mills Inc. and Kellogg Co. had been mentioned as potential targets. The acquisition would depend on Berkshire Hathaway for financing, according to a person familiar with the situation. “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,” said Paul Hickman, an analyst at Edison Investment Research. “Kraft Heinz will not have led with its best offer and a protracted negotiation probably lies ahead.” Unilever said the proposal was at an 18 percent premium to Thursday’s closing share price. Berenberg analysts said such a valuation would imply multiples of 3 times sales and 21 times earnings, “which strikes us as very low.”
Biggest Ever
Putting together Kraft Heinz and Unilever would create a company with combined sales of $84.8 billion last year. That would have ranked second among food and beverage companies, trailing Nestle SA’s $91.2 billion, according to data compiled by Bloomberg. Analysts at Jefferies & Co. suggested in a note that since Kraft Heinz has no non-food businesses, it may make an offer Unilever’s food interests and leaving a household and consumer-goods company. Among food and beverage transactions, a deal for Unilever would surpass Anheuser-Busch InBev SA’s purchase last year of SABMiller Plc for about $123 billion including debt, InBev’s purchase of Anheuser-Busch Cos. in 2008 and the 2015 transaction that created Kraft Heinz, according to data compiled by Bloomberg. The investors behind the Unilever bid were on all those deals as well. 3G Capital -- founded by Brazilian executives Jorge Paulo Lemann, Marcel Telles, Carlos Alberto Sicupira, Roberto Thompson and Alex Behring -- has engineered a series of huge transactions in the food-and-drink industries in which they acquire companies, install managers and slash expenses. 3G also acquired Burger King Worldwide Inc. and in 2014 merged it with Canadian doughnut chain Tim Hortons Inc. Kraft’s overture follows the worst annual performance of Unilever’s stock last year since the financial crisis in 2008. The shares fell 2.5 percent in the course of 2016, though European rival Nestle SA fared only marginally better, losing 2 percent in the same 12 months.



Kraft Heinz Takeover Bid Shakes Up Big Food and Its Slow Growth
Bloomberg News

URL: https://www.bloomberg.com/news/articles ... low-growth
Category: Business
Published: February 18, 2017

Description: Competitors relieved that Kraft Heinz Co. snubbed them for Unilever may want to skip the celebration. Campbell Soup Co., General Mills Inc., Kellogg Co. and Mondelez International Inc. were top potential acquisition targets for Kraft Heinz, and even though the company appears to have moved on, more consolidation could be on the menu. Whether or not the maker of Kraft Mac & Cheese can persuade Unilever to form the world’s second-biggest food company, struggling U.S. giants still face pressure to break their years-long sales malaise. “They’re probably breathing a sigh of relief, but then it becomes a question of what’s next,” said Brittany Weissman, an analyst at Edward Jones. “Sales aren’t getting better and at some point the cost cuts are going to run out.” Unilever spurned Kraft Heinz’s $143 billion offer Friday, saying the $50-a-share proposal was too low. A merger would unite Unilever products Dove soap, Axe deodorant, Lipton tea, Hellman’s mayonnaise and Breyers ice cream with Kraft Heinz staples Velveeta, Maxwell House coffee and Oscar Mayer processed meats. Only Nestle SA would be bigger.
Corporate Culture
When it comes to corporate culture, Kraft Heinz and Unilever seem at first blush to be at loggerheads. Unilever Chief Executive Officer Paul Polman has emphasized sustainability at the Anglo-Dutch company, and argued that profit and social responsibility are company goals. For Kraft Heinz’s managers, 3G Capital Inc., it’s all about a relentless focus on the bottom line. In 2013, 3G joined Warren Buffett’s Berkshire Hathaway Inc. to take H.J. Heinz private. In less than two years, 3G’s managers produced industry-leading margins at the ketchup maker. They slashed thousands of jobs, shuttered factories and eliminated employee perks. In 2015, Buffett and 3G orchestrated the $55 billion merger of Heinz and Kraft Foods, promising to cut annual expenses $1.5 billion by 2018. Kraft’s earnings before interest, taxes, depreciation and appreciation had consistently hovered around 20 percent of revenue pre-acquisition. The combined company’s margin now is 30 percent. Kraft Heinz is ahead of schedule on cost cuts and recently boosted its target to $1.7 billion, increasing speculation that a major food deal will come this year.
Deal Partner
But Unilever wasn’t the rumored deal partner. Conjecture focused on large U.S. companies that have struggled to increase sales amid changing consumer tastes. If Unilever says yes, U.S. competitors will be forced to reckon with a global behemoth. That could prompt General Mills, Kellogg, Campbell and Mondelez to seek deals of their own, according to Asit Sharma, an analyst at Motley Fool. “They would have tremendous scale that they could put to work in terms of lowering costs and increasing margins,” Sharma said. “If you’re a smaller player, it will be very difficult to compete.” Mondelez has already anticipated a possible Kraft Heinz takeover bid. In June, the maker of Oreo cookies made a $23 billion offer for Hershey Co. to strengthen its defenses. Hershey rejected the offer and rebuffed a higher bid before Mondelez ended the talks. Big Food continues to struggle to grow. The rising tide of foodie culture has consumers seeking out less-processed products, and they’re rejecting longtime grocery staples for brands from upstart companies promising more natural ingredients. Innovation is notoriously slow at large food companies, a problem in a digital age where consumer trends move faster than ever. 3G’s deal for Kraft put rival companies on notice: cut costs or risk being the next takeover target. And while the large U.S. food makers have been improving margins, in some cases speeding up their own cost-cutting initiatives, the benefits of reduced expenses go only so far. That means Big Food will ultimately have to figure out how to do something that has so far proved elusive -- develop new products that reignite sales. “They all have real serious problems on their hands,” said Erich Joachimsthaler, CEO of branding firm Vivaldi. “It’s a frustrating world right now. They can’t figure out how to innovate.”



Kraft Pulls $143 Billion Unilever Offer After Early Interest
Bloomberg News

URL: https://www.bloomberg.com/news/articles ... r-unilever
Category: Business
Published: February 19, 2017

Description: Kraft Heinz Co. withdrew its $143 billion bid for Unilever two days after the approach became public amid stiff opposition from the Anglo-Dutch target to engage in discussions. “Kraft Heinz’s interest was made public at an extremely early stage,” spokesman Michael Mullen said Sunday in an e-mailed statement. “Our intention was to proceed on a friendly basis, but it was made clear Unilever did not wish to pursue a transaction. It is best to step away early so both companies can focus on their own independent plans to generate value.” Unilever last week rejected a $50-a-share buyout offer by Kraft Heinz, saying the proposal “fundamentally undervalues” the household-products maker. Kraft, which sells products like Velveeta and Jell-O, faced an uphill battle in trying to get Unilever to negotiate, with the latter’s management fretting behind the scenes about Kraft’s cost-cutting model and its lack of vision for cultivating brands, people familiar with the situation said. Shares of Unilever jumped 13 percent to close Friday at a record 44.80 euros ($47.55) in Amsterdam. Kraft Heinz, based in Pittsburgh and Chicago, climbed 11 percent to a record in New York trading. The quick withdrawal of Kraft’s offer is surprising because Unilever’s defenses, including its low ownership by management and other anti-takeover policies, weren’t very high, said Ken Shea, a senior analyst at Bloomberg Intelligence. Kraft’s dealmaking credibility may take a hit going forward, he said. “The strange episode suggests that Kraft Heinz acted a bit hastily with its takeover plan, and evidently did not think it fully through,” Shea said Sunday. “Also, the timing and size of the bid -- coming just after its earnings conference call on Wednesday last week, in which it downplayed the need for acquisitions -- likely leaves their Wall Street credibility diminished.” The proposed deal, which would have been the largest-ever takeover in the food or beverage industry, would have created a company with combined sales of $84.8 billion last year, second only to Nestle SA. “Unilever and Kraft Heinz hold each other in high regard,” the companies said in a joint statement Sunday. “Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever.”
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