Does Kraft Heinz Co's £112bn offer mark the end of the road for Unilever plc?
In the past few hours, it has emerged that Kraft Heinz, one of the world's largest consumer goods companies, which counts Warren Buffett as a major shareholder, has approach Unilever(LSE: ULVR) with an offer of £115bn for the enterprise.
At the time of writing, shares in Unilever are trading up by 12.2%, valuing the company at a little under £114bn, more than £1bn below the proposed offer price. Kraft has offered a mix of cash and shares for Unilever, which works out at around £40 per share of the Anglo-Dutch company.
Unilever's management has already rejected the Kraft offer claiming that it substantially undervalues the company. As of yet, it's not clear if Kraft will return with a higher offer or attempt a hostile takeover.
Kraft's offer for Unilever has been met with a degree of caution from the City. Such a huge deal is bound to spark competition concerns. A combined Kraft-Unilever would give the enlarged group unrivalled bargaining power when it comes to negotiations with suppliers and retailers. What's more, if the company wanted to hike prices, few retailers would have the power to stop them. It wouldn't be just Marmite vanishing from the shelves of Tesco if Kraft-Unilever decided to fight the retailer over price.
Another potential concern is the issue of job losses. When Kraft and Heinz first merged, the majority owner of both companies (3G Capital) announced 7,000 staff, or 20% of the workforce, would be cut. The private equity firm did the same when it took control of Burger King in 2010. Naturally, unions are already worried if this mega-merger takes place that similar job cuts will happen. The Unite union, which represents Unilever workers has already issued a statement asking Unilever's management to reject the offer.
Investors should take today's announcement about the potential tie-up of Unilever and Kraft with a pinch of salt. The two parties may yet reach an agreement but any deal will be subject to significant regulatory scrutiny and won't be a simple affair.
Unilever has always been a high-quality company and today's offer does not change that. It makes no sense to base an investment case on Kraft's offer. Therefore, it's probably best for investors to do nothing. A deal may never happen, but there's also a chance that Kraft may come back with a higher offer. As a result, trying to time the market by selling now with the idea of buying-in again may backfire.
So overall, the best course of action for long-term investors is to not react to today's news at all. Unilever is not a struggling company that needs to be acquired to survive, if no deal takes place, the company still has a bright future ahead of it.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.