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It was a late entry, but global food and healthcare colossus Unilever (ULVR) is our Share of the Week this time after American giant Kraft Heinz confirmed it had approached its Anglo-Dutch rival about a possible mega-merger.
Unilever shares rocketed as much as 15% Friday to £38.48, a new high, despite Unilever chiefs swiftly rejecting the offer. After Kraft Heinz shares rocketed over 7% Friday, the cash and shares deal - $30.23 per share in cash and 0.222 Kraft Heinz shares - is worth over £41.
"Their proposal represents a premium of 18% to Unilever's share price as at the close of business on 16 February 2017," said the FTSE 100 company. "This fundamentally undervalues Unilever. Unilever rejected the proposal as it sees no merit, either financial or strategic, for Unilever's shareholders. Unilever does not see the basis for any further discussions."
It's pretty clear what the firm behind Hellmann's mayonnaise, Magnum ice creams and Domestos bleach thinks, and Unilever shares ended the session below £38. That implies the market believes the deal will not happen, at least not yet.
But it looks like Kraft, the American firm backed by billionaire investor Warren Buffett's Berkshire Hathaway vehicle and Brazilian private equity outfit 3G Capital, isn't going away. It said:
"While Unilever has declined the proposal, we look forward to working to reach agreement on the terms of a transaction."
Clearly, it will have to come up with more cash, probably much more. Unilever shares traded at £38.07 as recently as October before slumping to £30.50 in the aftermath of third-quarter results in which it warned of a "slow start" to the year. It also came during a very public spat with Tesco over pricing.
Sterling's post-referendum collapse increased costs for Unilever, whose numbers also get hit when it converts hefty UK earnings into euros, its reporting currency. Tesco refused to accept a 10% hike in prices by Unilever which eventually backed down.
There are issues for packaged food companies as younger consumers demand more fresh produce, and recent fourth-quarter organic sales growth of 2.2% disappointed investors. At least combining two businesses like Kraft and Unilever would further increase buying power and save money.
Will Kraft pay up?
Unilever shares have never been cheap and now, according to UBS earnings per share (EPS) estimates of €2.07 (177p) for 2017, trade on a forward price/earnings (PE) ratio of 21.5 times.
The broker said in a recent note it thought a multiple of 18 times is appropriate for 2018 forecast earnings, which values the shares at £34.74.
Of course, Kraft has already shown willingness to pay much more than this, and it will certainly not have shown all its cards at the first attempt. It will be prepared to cough up more than £115 billion to get its man, it just remains to be seen whether their final valuation matches Unilever's.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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