Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

It's not like Warren Buffett to have a deal crumble faster than investors could even say "Kreinzlever" -- or whatever the merger of Kraft Heinz Co. and Unilever would have been called.

Part of the reason Kraft Heinz's $143 billion bid (backed by Buffett and 3G Capital) never got off the ground was reportedly because word of the transaction seeped out to the public too soon. It tripped up their ability to negotiate a friendly deal with Unilever as M&A leaks often do, catching the target off guard and putting it on the defensive. While there are cases where trickling out information can help dealmakers gauge the potential market reaction to offbeat merger ideas, leaks were Kraft Heinz's worst enemy this time around. (Hmm, where have we heard that before?) 

If the packaged-food giant wants to get a megadeal done (and it clearly does, see my story last week), lips will need to stay sealed. For one, this simply isn't how Buffett operates. Kraft Heinz technically may be the buyer here, but it's Buffett's Berkshire Hathaway Inc. that will be bankrolling any deal (as he's done with the other two iterations of 3G/Kraft Heinz transactions). Berkshire and 3G together also own nearly half of the food company.

The timing is less than ideal for the billionaire. On Saturday, Buffett will release his annual letter to Berkshire shareholders, so he may be making a few last-minute edits now to address the Unilever deal snafu. In past years Buffett's letter has discussed his meticulous takeover strategy: secretive, no bidding wars and the target must be able to name a price so as to not waste the Oracle's time. It's turned the whole idea of being bought by Berkshire into something of an honor.  Teaming up with Jorge Paulo Lemann's Brazilian private equity firm has led to obvious contradictions with Buffett's usual approach, but it's worked ... aside from this recent hiccup. 

Following months of speculation that Kraft Heinz was hungry again, the leak of the Unilever proposal makes it official. But the esteemed dealmakers behind Kraft Heinz still must tread carefully as it would be not only an embarrassment to have another merger collapse, but it could also potentially make them appear desperate jumping from target to target. After all, it's thanks to 3G's famously strict cost policies that Kraft Heinz's margins may be nearing their peak. With revenue also stagnating, that makes an acquisition its best hope of posting meaningful growth going forward. 

Maxing Out
Kraft Heinz's executives, who come from private equity firm 3G Capital, are skilled at cutting costs to make businesses more profitable. But when margins peak it's time for another deal:
Source: Bloomberg

Buffett surely wants to see Kraft Heinz get another deal done. His role in the 2013 buyout of H.J. Heinz and then the 2015 merger with Kraft has been a home run for Berkshire, which got preferred stock in the combined entity that came with a handsome 9 percent annual dividend. That's much better than Berkshire's massive cash stockpile earns sitting in a bank.  Kraft Heinz common shares have also risen more than 30 percent since they began trading in mid-2015, a better performance than most peers.

Its interest in Unilever, a European conglomerate known more for soaps than food, broadens out the list of takeover candidates, as I said might be the case earlier this month when the Kraft Heinz speculation incorrectly centered on Oreo maker Mondelez International Inc. That's because 3G Capital's efforts to make Kraft Heinz a much leaner company has led food competitors such as Mondelez to implement similar cost-cutting initiatives -- so there's not as much room to drive returns. 

Meanwhile, margins at many home-and-personal-care products companies still trail that of Kraft Heinz, and those that are conglomerates (like Unilever) present an added opportunity for financial engineering by fixing up and selling off non-core brands. Toothpaste maker Colgate-Palmolive Co., Kleenex owner Kimberly-Clark Corp. and namesake bleach maker Clorox Co. are among stocks that have risen since Kraft Heinz's interest in Unilever was made public.

Brush Your Teeth
Takeover speculation has restored life to this toothpaste maker's stock. Is Kraft Heinz bringing back conglomerate-building?
Source: Bloomberg

As Buffett and 3G's team turn to plan B, here's what we can glean from recent events: Kraft Heinz will try do a megamerger this year and it won't necessarily be with another food giant. If they're smart, we won't hear a thing about it until all the t's have been crossed. But maybe Buffett's letter later this week will provide some clues as to their thinking.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Per U.K. takeover rules, Kraft Heinz can try again for a Unilever deal in six months, though it may have moved on by then. 

  2. ...even if it means the shareholders selling to Buffett may not be getting the highest price possible. But that's a story for another day.

  3. Kraft Heinz redeemed Berkshire's preferred shares last year, replacing them with lower-coupon borrowings.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net