Will Kraft-Heinz Make A Higher Bid For Unilever Later This Year?

Written by Bob Ciuia

When Warren Buffett sets his sights on a takeover target it is rare for him to come away empty-handed but that is exactly what happened when Kraft-Heinz (NYSE: KHC) failed in its acquisition attempt of European consumer products giant Unilever (NYSE: UL) last month. IMO, it would not be a shock to see Kraft-Heinz (NYSE: KHC) make a higher bid for Unilever (NYSE: UL) later this year as Unilever has many strong assets and would be a very valuable addition to Kraft-Heinz.

Buffett, who together with investment firm 3G owns 50% of Kraft-Heinz, was unable to buy Unilever for $143 billion. The offer, which amounted to roughly $50 per share, was rejected immediately by Unilever. In the aftermath of the rejection, Unilever management remained adamant that the offer deeply undervalued the company and, according to U.K. laws, Kraft-Heinz will have to wait six months before making another offer. But once the waiting period is over, it should try to do just that.

Why Unilever is Worth Acquiring

Unilever has many strong assets and would be a very valuable addition to Kraft-Heinz:

Unilever has a long operating history and has grown into one of the largest consumer products companies in the world. It was founded in 1885. Its product portfolio includes 13 brands that each generate $1 billion or more in annual sales.

Unilever would diversify Kraft-Heinz’ portfolio outside of just food. Unilever has several popular staples brands, including Dove, Axe, Comfort and more. This could provide diversification benefits to Kraft-Heinz.

Unilever has many high-quality foods brands which could add growth to Kraft-Heinz. This is particularly true when it comes to the emerging markets, where Unilever dominates. Unilever’s emerging-market sales — which represent nearly 60% of total revenue — increased 6.5% in 2016. This growth was due to 1.1% increase in volumes, and a 5.4% boost from price increases. Such strong pricing power is an indication of Unilever’s brand equity in these markets. When it comes to consumer staples, the emerging markets have been a tough market, even for industry giants like Procter & Gamble (NYSE: PG). Unilever has unique insight into what consumers are looking for in China, India and other developing markets.

Unilever spends heavily on R&D to spur product innovation. There would be huge opportunity for margin expansion if Kraft-Heinz made a successful bid.

There is a huge opportunity for cost synergies. 3G Capital, one of the backers of the deal and notorious for cost-cutting, is probably foaming at the mouth.