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Breaking up Unilever may pave way for Kraft merger: Sunil Alagh
17 Feb 2017 09:39 PM | Source: CNBC-TV18
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Breaking up Unilever may pave way for Kraft merger: Sunil Alagh
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US-based Kraft Heinz announced on Friday proposed a USD 143 billion merger with Unilever in what would be one of the biggest deals ever. But the Anglo-Dutch consumer goods giant has declined, saying in a statement the offer fundamentally undervalues" the company.

"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," the statement read.

Asserting that if the deal goes through it would be hard for Kraft’s shareholders to get good returns, former Britannia Industries Managing Director Sunil Alagh said breaking up Unilever would be the only way for the deal could go through in future.

"You have heard of a USD 25 billion, USD 50 billion deal, this is going into a ridiculously high level to even fund, to take care. I am sure they got a plan to break up the company. That is the only way this survive if it goes through," he said.

Even if Unilever accepts the Kraft offer, Alagh told CNBC-TV18, he expects the company to retain its food business.

Indian investors will now want to see how Unilever Indian unit Hindustan Unilever’s stock performs on the market when it opens on Monday.

Unilever shares soared as much as 10 percent on American bourses in premarket trading Thursday.

"While Unilever has declined the proposal, we look forward to working to reach agreement on the terms of a transaction," Kraft said in a statement. "[But] there can be no certainty that any further formal proposal will be made to the Board of Unilever or that an offer will be made at all."

Kraft is backed by private equity firm 3G Capital and Warren Buffett.

A deal with Unilever would add Hellmann's mayonnaise, Ben & Jerry's ice cream, and Knorr soups to a portfolio that includes Heinz ketchup and KraftMacaroni and Cheese.

— With inputs from CNBC.com

Below is the transcript of Sunil Alagh's interview to Shereen Bhan on CNBC-TV18.

Q: What do you make of this audacious bid by Kraft? For now, Hindustan Unilever saying it undervalues the company. There is no strategic rationale, we are not interested. But under the British takeover laws, Kraft has up to a month. Do you believe that this is only the starting point of a negotiation?

A: It generally is the only thing of course, that I can say is there is really no strategic tie up in this, because as you mentioned earlier, Unilever is fundamentally not a food company. If Kraft is trying to make a bid for this, I can only surmise or I can try and guess that they intend to break up the company. Even if Unilever accepts it, they will take the food part and merge it to themselves and then they will try and hive off the other part to anyone else that they find interesting which is the standard practice right from the time when Henry Kravis tried to takeover RJR Nabisco, they took the tobacco business out and then they took the food business and kept it only in America and then the rest of it, they sold to Danone.

So, everyone has a strategy because this is a massive amount of money and I am sure even Kraft does not want to take such a load on itself. For the next couple of years, their shareholders are not going to get a return which is very easy. So, A] it is audacious, not doubt about it, but finally money talks and every time I have seen either a beer company bidding for someone else and everyone else says it is ridiculous and finally the shareholders get down and say alright they will work out deals and hope that you get the best value because they will also own part of the new company. Now that is a tough one, USD 143 billion. You have heard of USD 25 billion, USD 50 billion, this is going into a ridiculously high level to even fund, to take care. I am sure they got aplan to break up the company. That is the only way this survive if it goes through.

Q: You pre-empted my question. I am just looking at a report that has been put out by Citi. It has a buy recommendation on Unilever saying buy because Kraft is coming. What Citi goes on to say is that there could be value in extracting costs out of the food business, but as far as the home and personal care (HPC) business is concerned, it also believes as you were saying that perhaps at some point, that could be divested off to other interested parties. So, this really is about extracting value and synergy out of the foods business between Kraft and Unilever. But Unilever, not that big in that side of the business anyway, so how would you make this work?

A: The bigger brands are with Kraft. If you look at Kraft and Heinz, whether it is ketchup or whether it is any of the businesses that Unilever is in, I do not think Unilever is a brand leader worldwide that Kraft is. So, for them to remove a competitor which can be eliminated, then they have a great pricing scene, they have to look at monopolies in various countries. This is too much for a person of my level to even absorb because there will be monopoly restrictions, there will be a hive off where I am sure Kraft intends to make money when they will hive off the rest.

So, they will fund their buyout through profits that they make from the other – but this is all guess work at this stage and as it folds out, it will be interesting to have a kind of a panel which discusses it together and get some views. I have seen enough of this and this is a very serious bid, it is possible that the Unilever people have never seen their shares go up as much as they will by the end. It is 18 percent now, it could easily go up to 24 percent by the end of the month if money is question.

Nobody makes a complete bid in the beginning. They have something up the sleeve knowing that if financials, that ishow they will tempt all the other shareholders. Even if the board says no, they will have to go to the shareholders.


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