World Class Faculty & Research / February 22, 2017

A Better Mate for Kraft Heinz?

SMITH BRAIN TRUST – It was a brief courtship, and then an amicable parting of ways. But for Kraft Heinz, there may be other fish in the sea.

Less than 48 hours after disclosing that it had made a $143 billion bid to buy Unilever, Kraft Heinz announced Sunday that it had walked away, with the two companies issuing an unusual joint statement professing their "high regard" for one another.

Shares of both the Anglo-Dutch consumer giant and the U.S. ketchup maker slumped on news of the parting, but gave up only about half of their gains from Friday, with investors holding onto hope of another matchmaking.

David Kass, clinical professor at the University of Maryland's Robert H. Smith School of Business, has been thinking about potential matches for Kraft Heinz, whose board includes American billionaire investor Warren Buffett and Brazilian-born billionaire investor Jorge Paulo Lemann of 3G Capital. Kass has closely followed Buffett's investments and philosophy for more than 35 years.

Kraft Heinz is food focused. But Unilever's brands include a mix of food and personal care items. "Food is only 43 percent of the company – and shrinking," says Kass. That's, in part, because profitability has been higher in home and personal care items, and that's had the company focused more on those products, and looking to sell off some food stuffs. "They're focusing on growth."

For Kraft Heinz, a marriage with Unilever offered product extension – a chance to branch into the expanding personal care realm – and offered geographical expansion as well. About 57 percent of Unilever's $66 billion in sales last year came from emerging markets, where Kraft Heinz isn't well represented. "That's attractive. Emerging markets is where the growth is," Kass says.

With the Unilever matchup now in tatters, Kass says Kraft Heinz's next takeover target will likely offer those same benefits – home and personal care products, and a path into emerging markets.

What might be the next possible targets for Kraft Heinz?

Procter & Gamble. The Cincinnati-based consumer goods giant is considerably larger than Unilever, with a long list of home and personal care products and an even more global reach. Unlike Unilever and Kraft Heinz, it doesn't have food brands.

The personal care lines bear a fairly strong resemblance. While Unilever makes TRESemme, Suave and Nexxus hair care products, Procter & Gamble makes Pantene, Herbal Essences and Head and Shoulders. While Unilever makes Q-tips, Procter & Gamble makes Puffs tissues.

However, P&G also has a long list of household cleaning and laundry detergent brands, something Unilever lacks, and, of course, there are the diapers. P&G owns both the Pampers and Luvs brands. Procter & Gamble has a market capitalization of about $235 billion, compared to about $127 billion for Unilever.

Colgate-Palmolive: The New York-based Colgate-Palmolive is smaller player, but may have plenty to offer Kraft Heinz.

It doesn't have as many brands as Procter & Gamble, but Colgate-Palmolive, with its namesake toothpaste, dish soap and other consumer products has a strong global presence. In fact, most of its business is outside of the U.S. "Colgate is very big in Latin America and that's a whole new market that's growing," Kass says.

Among its other virtues, Kass says, is its size. Colgate-Palmolive, with a market capitalization of only about $68 billion, would be "more acquirable."

In fact, Colgate-Palmolive's stock surged Friday morning on news about a potential Kraft Heinz and Unilever deal. Investors were betting that Unilever, perhaps looking to avoid a takeover, might look to merge with Colgate-Palmolive as a white knight, making it more difficult and more costly for Kraft Heinz to make a deal. And the stock has only added to those gains this week, on news that the Unilever deal wasn't meant to be.

"Colgate," Kass says, "makes sense."

An alternative play: Kraft Heinz could just play it safe and stick to its earlier script of acquiring another food company, Kass says. If so, Mondelez International, the Illinois-based multinational snacks and beverage brand that was spun off from the current Kraft Foods in 2012, would be a likely candidate, he says.

The company, with brands such as Oreo, Chips Ahoy!, Triscuit, Nabisco, Milka, Toblerone, Cadbury, Trident, Dentyne, and Tang powdered drinks, has a presence in about 165 countries, giving Kraft Heinz the geographical reach it needs. Mondelez has a market capitalization of about $68 billion.



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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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