Six Months Are Nearly Up: Time For A Kraft Y Unilever Takeover

THE UNILEVER takeover bid by American food giant Kraft may be back on again, if analysts at Susquehanna Financial Group are to be believed. In a research note, they observe that while there's no concrete evidence to suggest Kraft will make another offer, the circumstances make it likely that it will.

Kraft has not openly identified another potential takeover target since its failed attempt to buy Unilever, suggesting that it's keeping its powder dry for a major move.

Unilever remains a good fit strategically if Kraft wants to expand into the food sector. Unilever shareholders, who have already seen the firm's share price rise significantly after the initial offer, would stand to make a healthy profit in the case of a successful takeover, making it likely that they will back a potential deal.

Susquehanna also point to the fact that an initial negative answer isn't necessarily the end of a large takeover story like this one. After all, the Anheuser-Busch Inbev takeover of SABMiller took several failed bids and more than a year's worth of wrangling to complete. The note further stresses that by next month the six month cooling off period after a failed bid, which is mandatory under British law, will have come to an end. Kraft will therefore have both motive and opportunity to make another move.

So there are plenty of reasons for Unilever to prepare itself for a renewal of discussions with Kraft over the coming months.

But if the Anglo-Dutch company has a plan for dealing with it, it hasn't shown it yet. It took a few symbolic measures to shore up investor confidence, including the selling of the company's unprofitable Dutch heirlooms - the Van den Bergh margarine factories.

There is little evidence, though, to suggest that the company's leadership actually understands the size of the challenge it is facing. Chief executive Paul Polman has used recent interviews to underline his commitment to the old way of doing things, most explicitly in a conversation with Jim Cramer on CNBC in early May: "I think it's better if [Buffett] leaves us with what we know how to do well. There's nothing wrong. Here you see two conflicting models: us, a long term compounding growth model, and someone here that really hasn't proven that they can grow."

If there really are two conflicting models, they exist only in Polman's own mind.

On the one hand, there is the Unilever as he believes it to exist: "double the market growth, enormous returns".

On the other hand, there is the real Unilever: a struggling outfit that, when faced with the failure of its emerging markets strategy, used artificial measures like increasing royalty payments from partner companies in countries like Indonesia, India, and South Africa, to paper over the cracks. A firm that's share in 2016 underperformed the stock market to such an extent that financial papers ran comment pieces wondering "what's wrong with the Unilever share?". And a company that, even when confronted with such clear evidence of its own shortcomings, still claimed it was "surprised" when Kraft launched its takeover bid.

Instead of critically reviewing the causes of the Kraft takeover bid - its failed business practices - Unilever has spent the past five months lobbying the governments of the United Kingdom and the Netherlands to introduce protective measures against "hostile" foreign takeovers.

Fortunately, British and Dutch politicians have so far ignored the siren call of protectionism. Provided the merits of a final deal are clear, a potential merger shouldn't be a political issue. In the end, it should be down to shareholders and employees to work it out between themselves.

Right now, Kraft's seems the stronger case: it makes sense from a business-strategic point of view, and would significantly benefit shareholders. Should Unilever want to persuade the world to see it otherwise, it needs to up its game. There may be a case for a continued existence of Unilever as an independent market player, but a "there's nothing wrong" message is clearly not enough.

£ Joshua Livestro is an independent consultant and writer based in Guernsey.

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