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Update: Shares in Unilever (ULVR) have fallen after Kraft Heinz abandoned its $143 billion bid just two days after confirming the opportunistic offer for its consumer goods rival.
In a joint statement with Unilever, Kraft Heinz said it had ‘amicably agreed to withdraw its proposal for a combination of the two companies’.
‘Unilever and Kraft Heinz hold each other in high regard. Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever,’ the companies said.
In a separate statement Kraft Heinz said that ‘its interest was made public at an extremely early stage. Our intention was to proceed on a friendly basis, but it was made clear Unilever did not wish to pursue a transaction.’
Shares in Unilever dropped 7.3% to £35.16 on the news, although they remain 5.3% higher since news of the bid broke on Friday.
'While the share price fall is its biggest in 13 years, the shares are still higher than they were prior to the Kraft bid becoming public,' said Michael Hewson, chief market analyst at CMC markets UK.
'While this bid appears to have fallen at the first fence it undoubtedly keeps the focus on a sector that could see further consolidation.'
The early withdrawal by the Warren-Buffett-backed US food group came as the scale of shareholder and political opposition to its attempt to acquire the Anglo-Dutch maker of Dove soap and Magnum ice cream became clear.
'Whilst it has resulted in a rollercoaster ride for the consumer goods company over the past couple of days, we believe Friday's $140 billion bid materially undervalued the company, and at that valuation Unilever is better off as a standalone business, than as part of Kraft Heinz,' he said.
'Events since Friday have helped to underpin the valuation of Unilever in our view. Paul Polman and his senior management team have refocused their efforts towards raising free cash flow growth and recent events will only serve to galvanise management and expedite these aims, with shareholders at the forefront of their mind.'
Mark Martin, who runs the Neptune UK Opportunities fund, agreed Kraft Heinz’s offer of $50 per share for Unilever undervalued the business, even though it represented an 18% premium to last Thursday’s closing price.
According to Neptune’s analysis, this offer would only see Kraft paying for seven years' worth of the company’s capital growth on average.
‘This is not all that much, given Unilever’s history and how many years it has taken to build the business up. It is 88 years old and has some brands that have an incredible heritage, arguably which money can’t buy,’ he said on Friday.
Speaking before Kraft dropped its bid, Martin said: ‘It slightly depends how long-term investors are. For a lot of short-term shareholders they might be happy with that. I think the current offer price significantly undervalues the strength of its heritage, brands and the history Unilever has of operating in markets around the world with strong growth prospects,’ he added.
A takeover by Kraft for Unilever would have created the world’s second-largest consumer goods group by sales behind Nestle but the hostile response to the news of its approach on Friday alarmed Buffett and Brazilian private equity veteran Jorge Paulo Lemman. Their Berkshire Hathaway and 3G Capital businesses control nearly 50% of Kraft Heinz shares.
A hostile bid would have pitted Unilever chief Paul Polman, who has attempted to balance the group’s strong position in emerging markets with environmental sustainability, against Lemman, an aggressive cost-cutter who who has expanded Kraft through debt-funded acquisitions.
The UK government and Unilever’s shareholders will probably feel relieved by Kraft’s U-turn, given the controversy it caused with its acquisition of British chocolate maker Cadbury six years ago.
Kraft had promised to not close a factory in Somerdale, near Bristol. However, once the deal completed it reneged on its promise, prompting the Takeover Panel to issue its first reprimand against a company in three years.
Martin does not hold Unilever in the UK Opportunities fund, although it does feature in other Neptune funds. He also holds PZ Cussons (PZC), the company behind Imperial Leather soap, whose valuation was ‘just as appealing’, he said, and so could also attract interest from an overseas bidder exploiting the 17% fall in the pound since the Brexit vote last June.