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Kraft Heinz bid for Unilever made sense on paper, but not in practice

Kraft Heinz Co. has abandoned its $143-billion (U.S.) takeover attempt of Unilever PLC, the Anglo-Dutch consumer-products giant that stuffs supermarket shelves around the world with Dove, Lipton, Knorr, Ben & Jerry's, Vaseline and Hellmann's products. The withdrawal of the bid marks a blow for U.S.-style capitalism and a victory for Unilever's peculiar business model, which does not make the corporation the automatic slave to shareholder returns.

While the deal, on paper, made strategic sense for Kraft Heinz, whose brands include Heinz Ketchup and Kool-Aid, it probably would not have worked in practice. The cultures of the two companies are mostly at odds. Putting them together would have been the equivalent of merging a European socialist party with the U.S. Republican party, no doubt creating a mutant, hybrid beast prone to infighting.

Kraft Heinz's biggest shareholders – Warren Buffett and the Brazilian billionaires, led by Jorge Paulo Lemann, who control the private equity group 3G Capital – probably knew that Unilever would not take kindly to the prospect of Kraft Heinz ownership. For clues to Unilever's probable reaction, all they had to do was read the speeches of Paul Polman, the company's Dutch chief executive officer. "The very essence of capitalism is under threat as business is now seen as a personal wealth accumulator," he said in 2012. "We have to bring this world back to sanity and put the greater good ahead of self-interest."

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Kraft Heinz hit the road on Sunday, only two days after publicly confirming its pursuit of Unilever. On Friday, Unilever had said the offer, worth $50 (U.S.) a share in cash and stock, "fundamentally undervalues Unilever" and the company saw "no merit, either financial or strategic" for its shareholders. Had the takeover gone ahead, the new company would have been the world's second-largest consumer-products group, after Nestlé SA.

On Monday, Unilever shares closed down 6.6 per cent on the news that the Kraft Heinz bid was dead, though they lost only half the gains they had made on Friday, when the bid was revealed.

Over the weekend, before it was known that Kraft Heinz would retreat, Unilever's allies were already gearing up for battle. The most prominent of which was British Prime Minister Theresa May, who ordered a review of the takeover proposal. Brexit-bound Britain is in no mood to lose head offices and factories. The memory of Kraft Foods' 2010 takeover of Britain's Cadbury is still fresh (H.J. Heinz and Kraft Foods came together in 2015). Shortly after the 2010 deal was completed, Kraft reneged on promises to keep a big Cadbury chocolate factory in Britain alive, heightening Britons' resentment of globalization.

Kraft Heinz's strategy for Unilever would have been simple – cost cutting, and lots of it. According to the Financial Times, former Nestlé chairman Peter Brabeck-Letmathe has described 3G's cost strategy as "ruthless."

From the American and Brazilian points of view, the takeover premium for Unilever could have been recouped by an epic crunching exercise, similar to the one that turned Kraft Heinz into a shareholder's dream – Kraft Heinz's margin before interest, tax, depreciation and amortization has doubled in recent years. Data from S&P Capital IQ show that Unilever's cost of sales, as a percentage of revenue, is about double that of Kraft Heinz's.

But Unilever is not all about pleasing shareholders. Under Mr. Polman, 60, the former Nestlé and Procter & Gamble Co. executive who has been Unilever's boss since 2009, Unilever has taken a broad stakeholders' approach that emphasizes long-term value and "sustainability" over short-term returns. Early into his tenure at Unilever, Mr. Polman said to investors, "don't put your money in our company" unless they bought into his management view.

Mr. Polman has ended quarterly-profit reporting and earnings guidance and told hedge funds they would not be indulged, all the better to focus management and shareholders on ecofriendly, long-term development. In came Unilever's "Sustainable Living Plan," an ambitious, if hazy, concept that has made Mr. Polman a hit among sustainability advocates, particularly Oxfam.

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The plan's three main goals made Unilever seem more like a United Nations agency than a dividend machine: Improving the health and hygiene of a billion people by 2020; enhancing the livelihoods of millions of people through job creation, training and other social benefits; and reducing the environmental footprint in the making and use of Unilever's products by half.

Mr. Polman has admitted the goals will be hard to achieve – the environmental-footprint goal was recently extended by a decade, to 2030. But the plan has already produced results. The company's carbon-dioxide output per tonne of production fell by more than a third between 2008 and 2015. Waste material per tonne of production fell by 97 per cent. On the social front, the Unilever factory in Khamgaon, India, sponsored the launch of a training centre for women who want to work in beauty parlours. More than 600 women found jobs or started their own businesses.

Of course, having sent Kraft Heinz packing, Unilever will have to pay more attention to margin improvement, since the takeover attempt exposed the wide margin gap between the two companies. But rejecting Kraft Heinz's takeover attempt was the right strategy. For capitalism to survive and thrive in the era of anti-globalization, shareholder returns can no longer be the overwhelming priority. In that sense, Unilever is not broken because it does not imitate Kraft Heinz's margin-improvement strategy; instead, it's an inspiration.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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