Household goods and food firm Unilever may be forced to cut costs to appease stakeholders and stave off another takeover bid, say industry analysts.
The Anglo-Dutch conglomerate behind Marmite and Dove soaps successfully fought off a $143bn approach from US food giant Kraft Heinz just two days after press reports forced it to disclose the unsolicited bid.
After the companies released a joint statement announcing that Kraft Heinz had amicably agreed to withdraw its proposal, the American food company, whose brands include Philadelphia and WeightWatchers, vowed to keep up its pursuit.
“While Unilever has declined the proposal, we look forward to working to reach agreement on the terms of the transaction,” it said.
Under market rules, Kraft Heinz must wait six months before it can return to the table with another bid.
Unilever said Kraft Heinz had offered $50 a share for the company, split between £30.23 a share in cash payable in US dollars and 0.222 shares in the combined company, valuing the target at $143bn.
After rejecting the offer, analysts predict Unilever will be put under pressure from shareholders to improve financial performance and lift the group’s 15% operating margin towards Kraft’s 23%, pushing the share price to over the $50 offered by Kraft.
Mike Fox, head of sustainable investments at Royal London Asset Management, which holds a 0.66% stake in Unilever’s UK-listed shares, told the Financial Times the company’s decision would have to be backed-up by a boost in profit margins.
“We backed the management’s decision to reject the bid by Kraft Heinz and we have no concerns with the strategic direction of Unilever,” he said.
“The challenge for Unilever management now will be to deliver the recently announced strategy of improving margins and above-market growth.”
Unilever chief executive Paul Polman unveiled a cost-cutting programme last year, borrowing Kraft Heinz’s zero-based budgeting model, under which any additional spending has to be funded by cost savings, to double his target for expanding Unilever’s margins by between 0.4% and 0.8% by 2019.
Julian Wild, head of food at law firm Rollits told the Daily Mail the bid was a wake-up call for Unilever to start cutting costs to their boost profit margins before another takeover bid surfaced.
“Now Unilever is under the spotlight, the pressure will stay,” he said.
“It will have to have a pretty major review of its operations, including looking at the people they employ and potentially selling part of the business.”
According to Forbes, a clash of corporate cultures was behind the takeover failure, as Unilever's long-term goal to double the size of the business while reducing its environmental footprint and increasing the firm’s positive social impact was at odds with Kraft Heinz's aggressive cost-cutting ethos.
In January Unilever pledged to go green on all its plastic packaging and it is working towards sending no waste to landfill.
Kraft Heinz, backed by Berkshire Hathaway and run by Warren Buffett’s deal partner Brazilian private equity firm 3G Capital, is famed for boosting returns through aggressive cost-cutting including heavy job losses.
After Buffett teamed up with 3G to buy Heinz in 2013, they closed six factories and cut 7,000 jobs in 18 months, with operating margins jumping from 18% to 26% thanks to zero-based budgeting, which dictates that managers must justify all expenses, from pencils to forklifts.
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