While the narrow-moat firm abandoned its bid for wide-moat Unilever, we doubt its interest in consolidating the space has subsided.
Erin Lash, CFA
05:42 AM | Email Article
A few short days after its interest in wide-moat Unilever
was made public, narrow-moat Kraft Heinz
conceded it was abandoning its bid (which on Feb. 17 amounted to $50 per share, or $156 billion on an enterprise basis, equating to around 17-18 times trailing EBITDA). We had speculated that Kraft Heinz would need to up the ante above the 18% premium to Unilever’s stock price prior to the announcement, but it has also been reported that an additional factor leading to the deal's demise stemmed from concerns over culture (particularly surrounding 3G’s stringent cost-cutting and whether that stood to impair the inherent brand equity across its packaged-food and household and personal-care operations). Overall, this news fails to alter our fair value estimates of $69 for Kraft Heinz and EUR 40/GBX 3,600 for Unilever, which remain in place.
Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.
In accordance with the U.K. takeover code, Kraft Heinz is restricted from making another approach toward the European consumer products firm for the next six months. However, while this takeover has been thwarted, we doubt its interest in consolidating the space has subsided. It is far from clear where its intentions lie, but Kraft Heinz could opt for a partner with outsize exposure to faster-growing emerging markets (where its penetration is not robust, representing a mere 10% of total sales) and the opportunity to extract meaningful costs persists (in line with the strategic benefits a deal with Unilever stood to offer). However, we don’t expect Kraft Heinz will opt for a hostile tie-up, as evidenced by its quick decision to end its pursuit of Unilever. We’ve long thought Mondelez
could fit the bill, but the strides the wide-moat snacking firm is making to bolster its profitability (adjusted operating margins jumped to more than 15% in fiscal 2016, up almost 500 basis points over the past four years), signal that reuniting Kraft’s North American grocery operations with its former global snack business may be less likely now.
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