Why Unilever rejected Kraft's proposal for the second-biggest merger ever

The packaged-food industry is in a rough spot. A combined Kraft Heinz and Unilever would create a global behemoth. 

First Look

Unilever turned down a takeover bid by US-based food company Kraft Heinz Co. on Friday, saying the $143 billion offer – one that would have been the second-biggest merger of multinational companies ever – undervalued its worth.

The British-Dutch company, whose products include Lipton tea, Axe deodorant, and Dove soap, recommended that its shareholders take no action after rejecting the $50-per-share bid. 

"This is cheap money meeting industrial logic," Steve Clayton, manager of the HL Select UK Shares fund at Hargreaves Lansdown, which owns shares of Unilever, told Reuters. 

"Kraft Heinz are attempting a massive push on the fast forward button ... to acquire the sheer scale of brands that Unilever represents through one-off acquisitions could take decades," he added.

Kraft Heinz seemed to suggest it could follow up with another offer in a statement to the stock market, saying it was "working to reach agreement on the terms of a transaction," although Unilever indicated that it saw no reason for further talks, in a statement of its own. 

The attempt may highlight the impact of Brexit on Unilever, which has suffered in the aftermath of the referendum.  

In October, The Christian Science Monitor reported that the grocery chain Tesco had stopped stocking a wide range of Unilever products, as the declined value of the pound caused price hikes for imported goods in Britain: 

The move, which has seen the goods removed from Tesco’s online site and supplies dwindling in-store, is part of a standoff between the grocery chain and its biggest supplier. Unilever proposed price raises averaging 10 percent across their product range.

For Unilever, the decision to raise prices was driven by falling profit margins. The pound has dropped by almost a fifth against the dollar and the euro since the Brexit vote in June, meaning that products imported from elsewhere now cost more. But Tesco, which is engaged in an ongoing price war in the intensely competitive British grocery market, would prefer not to raise prices on its shoppers.

Slowing growth in emerging markets, where Unilever has had a strong presence, has also affected the company’s numbers. It’s one of a series of economic trends that bode poorly for the packaged food industry, along with competition from upstart brands and more health-conscious consumers.

With a market value of $106 billion, Kraft Heinz is considerably smaller than Unilever. But it is about 50 percent controlled by two of the world’s richest men, Warren Buffett and Brazilian investor Jorge Lemann, who have been undertaking deals that have caught the attention of the food and drink industry, such as the Anheuser-Busch takeover of SABMiller and the merger of Kraft and Heinz in July 2015.

If Unilever and Kraft Heinz were to combine, notes The Guardian, it would result in a foods giant comprised of 210,000 staff, with revenues of more than $65 billion and a stock market value of more than $210 billion.

Kraft’s proposal would have been second only in size to a 1999 deal that saw British telecommunications giant Vodafone AirTouch acquire Germany’s Mannesmann for some $172 billion, according to Business Insider.

This report contains material from Reuters.