KraftFoods and Heinz announced on Wednesday that they haveagreed a merger deal, which values the equity of Kraft at $39.3bn (excluding a special cash dividend to be paid to Kraft shareholders). In my opinion, there is another target in the UK that could be sold for a similar staggering amount.
Want to know more?Well, read on!
The Deal & What ItMeans ForConsumer Companies
The Kraft/Heinz tie-up creates theworlds fifth largest food and beverage company.The deal is essentially a takeover of Kraft by Heinz,andhas been facilitated by3G Capital Partners and Warren Buffetts Berkshire Hathaway, which joined forces to acquire Heinz for $23 billion in 2013.Heinzs owners are paying top dollar to bulk up the ketchup maker.
3G andBerkshirewill help the combined entity (Kraft Heinz Company) finance a$9.7bn cash dividend to Krafts shareholders, which says a lot about how important it is for major players in the consumer industry to grow in size while seeking efficiency by cutting costs.Huge cost synergies are expected, of course, as is often the case in mergers and acquisitions.
Double Or Quits.?
3G andBuffett have indicated the way forward for major producers in the broader consumer industry.Growth is not a word in vogue in the consumer space, whereits hardto grow volumes and raise prices to generate the kind of returns that shareholders expect.
But while some players need to grow, others must shrink.
TakeUnilever(LSE: ULVR) (NYSE: UL.US) and anotherUK consumer goods group, such asReckitt(LSE: RB) for them, it may not be business as usual. Heres why.
A ($40bn) Smaller Unilever
Some 57% of Unilevers turnover in 2014 came from emerging markets, where trailing trends are decent with average emerging markets growth at 9% between 2010 and 2014, according to its annual results but long-term value is jeopardised by likely lower growth rates, as recent trends show.
The value of Unilever hinges on the value of its personal care and food units, which contribute to the majority of its 48.4bn annual sales.
Sales from personal care and foods represent 37% and 25%, respectively, of the groups total, while operating profit for personal care stands at 41%, four percentage points lower than for that of the food unit. Both divisions have core operating margins in the region 18.7%, but underlying sales growth for personal care was 3.5% in 2014, with rising volumes (+1.2%), while food sales declined 0.6%, with volumes down 1.1%.
The food unit certainly dilutes the value of the whole, and depending on certain assumptions for its fair value, it could could be worth between $35bn and $45bn. Will any private equity house such asBlackstone, KKR and TPG Capital be tempted to team up with a strategic buyer and emulate Mr Buffett?
Thats a possibility.
What is known, though, is that as Unileverfocuses on its personal care unit (which has grown a lot since the credit crunch) Unilever still needs a solution for its sluggish food business. That said, Unilever is still a decent buy that could deliver 10% pre-tax returns annually, even in its current form.
The Show Goes On At Reckitt
Reckitt announced the spin-out of its pharmaceuticals unitlast year, while more recently it said it would focus on efficiency to shore up earnings anddeliver value to shareholders.
Indivior, its spun-off unit, has surged since its shared were listed, and Reckitt has also benefited from the separation, with its shares up in the double-digit territory in less than a quarter.
Reckitt operates other appealing divisions, and its assets could certainly attract bids. Its likely that a further round of portfolio rationalisation will follow efficiency measures such as cost-cutting, which wereannounced recently.Thats not a good enough reason to invest in Reckitt perhaps, but then if you want to know more about why Reckitt could be a star performer,just have a look at my recent coverage.
And if you are hunting for value, along withReckittand Unilever, I urge you to consider a few strong candidates for a diversified portfolio thataims to deliverpre-tax returns in the double-digit territoryon an annual basis.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of 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.