Most of the investors were intrigued when the news broke on Friday that Kraft Heinz (NASDAQ: KHC) made an initial $143 billion bid for Unilever (NYSE: UN). KHC, with 1.217 billion shares outstanding, leaped $9.37 per share on Friday, to close at $96.35, accelerating its market capitalization by $11.4 billion to $117.6 billion.
On paper, this was a good day for Warren Buffett, who’s cutthroat 3G Capital owns 24% and Berkshire Hathaway owns 27% of Kraft Heinz. KHC’s trading volume was brisk at 30 million shares, which was nearly 10X its 3.2 million average volume. Unilever’s ADR raised over 15%, with 42.4 million shares traded, over 14X more than its average volume.
However, what a difference 48 hours makes, as we quickly learned that KHC has pulled its bid after learning that Unilever’s CEO and board declared extreme caution in the way KHC does business including its notorious history of major layoffs, leveraged balance sheet, lack of innovation, and its perception that KHC’s brands are low brow.
Unfortunately, it appears that too many investors shot first without asking critical questions and didn’t properly assess the inherent risks of a hostile deal, as Unilever just wasn’t that into Kraft Heinz, despite the ‘inadequate 18%” premium. This is a precious lesson for all of us that M&A arbitrage is a tough game that is better left to the pros like SA’s Chris DeMuth Jr. And even for a seasoned veteran like Chris, who has a good track record in this space, sometimes, even Chris can get it wrong, just see the Rite Aid / Walgreens (NASDAQ:WBA) deal that recently blew up.
For a brief history, Heinz, lead by 3G Capital, which is controlled by Brazil’s wealthiest man, Jorge Paulo Lemann acquired Kraft Foods in a deal valued at $46 billion. This included roughly $60 per shares for Kraft shares (or $36 billion) in the new entity plus $16.50 per share in cash, or roughly $9.7 billion. The deal officially closed in early July 2015 and this Forbes article provides the greater details. Looking at Kraft’s FY14 10-K, it sure looks like Heinz overpaid for Kraft. Heinz paid 22X cash flow for a company that generated $2 billion in cash flow from operations in FY14.