There is some strategic rationale to the tie-up, but given the higher price that would be needed to bring Unilever to the table, we don’t see the takeover as imminent.
Erin Lash, CFA
10:58 AM | Email Article
Contrary to our belief it remained laser-focused on extracting costs (after bumping up its target to $1.7 billion from $1.5 billion on Feb. 15), narrow-moat Kraft Heinz
confirmed on Feb. 17 it approached wide-moat Unilever
about a potential tie-up. The initial proposal amounted to $50 per share ($156 billion on an enterprise basis, or around 17-18 trailing EBITDA) and consisted of $30.23 in cash and 0.222 in shares. While the offer represented an 18% premium to Unilever’s stock price prior to the announcement and is 14% above our $44 fair value estimate, the European firm rejected the approach.
Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.
In accordance with U.K. takeover code, Kraft Heinz now has until March 17 to announce a firm intention to make an offer or that it doesn’t intend to pursue a deal. From our vantage point, it is far from certain whether a deal is imminent, and even if one is inked, it is unlikely to be completed at the initial proposal. In this vein, we’re holding the line our $69 fair value estimate for Kraft Heinz and our EUR 40/GBX 3,600 for Unilever. Although Unilever doesn’t appear to be interested, we don't believe Kraft Heinz is willing to close the book on this deal but would likely need to offer a higher price and potentially boost the cash component to bring Unilever to the table. In our view, if Kraft Heinz were to offer around 19 times (or near peak multiples for past industry deals), which equates to $165 billion-$175 billion on an enterprise basis, Unilever may be more amenable to a tie-up.
While we recognize the strategic attractiveness (Kraft Heinz stands to gain exposure to faster-growing emerging markets while Unilever could benefit from 3G’s stringent cost-savings culture), the sheer size of the deal could substantially weaken Kraft Heinz’s credit profile, particularly given its leverage is still elevated around 4 times. But similar to the merger between Kraft and Heinz, Berkshire Hathaway could offer some financing, which may make funding the deal more palatable.
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