By: Gerard Rijk
 
KraftHeinz (KHC)’s failed bid on Unilever should undoubtedly be a wake-up call for equity investors. Had the bid been successful, there would have been less transparency in accountability and sustainability reporting and a reduction in Unilever’s long-term value creation agenda. More specifically, there would have been significant negative implications such as substantial job losses, pressure on prices for suppliers in agricultural food chains, lower corporate tax payments, and less focus on sustainability as Unilever is one of the leaders in sustainability, while KHC is one of the laggards. 

On 17 February, KHC announced a bid on Unilever for $ 143 billion. This move would have created the world’s 2nd largest consumer goods company with $85 billion in joint sales. Two days later, KHC withdrew the bid citing early deal leaks as reason why ‘efforts to negotiate a merger on a friendly basis’ was impossible. Unilever on its part claims that the bid ‘fundamentally undervalued’ their company and holds neither financial nor strategic benefits for its shareholders.

Profundo’s sustainable valuation methodology values future cash flows in a different way than mainstream analysis.  For instance, by incorporating the sustainability-driven sales and margin growth in Unilever, we estimate its value per share at $60 versus a current share price of $47 and a KHC bid of $50. Consequently, we see increased value for Unilever, stemming from its underappreciated sustainability standing. KHC is 51% owned by a group of Brazilian investors (3G) and Warren Buffett. 3G is known from the beer industry. In 10-years’ time 3G has expanded a local position in the Brazilian beer market into global leadership through AB InBev. KHC would have raised Unilever’s margin from 15.3% of sales towards the much higher level of KHC’ (27.3%; 2016). In KHC, the Brazilians executed such a change in 3-years’ time. The growth margin at the acquired Unilever entities would have increased KHC’ earnings per share by 110%. We estimate that KHC’s share price could have increased to $170 in a few years’ time (vs $95 now). On the short-term, the deal could have been financially very attractive to (pension) funds and other investors owning Unilever shares.

The fact that billionaires are buying out publicly listed companies should wake up investors. Although investors use engagement, selection and exclusion policies to raise the sustainability of their portfolios, the continuing globalization of capital markets and the increasing wealth of billionaires will fuel the process of de-listing of publicly traded companies. This negatively affects the opportunities for engagement and exclusion, and entails less transparency, less accountability and reduced sustainability.   

Furthermore, both investors and sustainable companies should be more alert to protect long-term value creation. The higher sustainability of Unilever’s brands will in the long term accelerate the growth in market shares and in sales growth rates. As a result of the take-over bid, shareholders will press Unilever to return more money to its shareholders as its balance sheet is very strong. They will also call for further cost reductions, but shareholders should be aware that cost reduction should focus on those costs that do not support the sustainable growth of Unilever’s products.
 
Ultimately, investors should sophisticate their valuation of publicly-listed sustainable companies. The resulting higher share prices for these companies would form a natural protection against unfriendly bids and perhaps provide sustainable companies with increased firepower to acquire less-sustainable companies. Such an investment strategy will not only contribute to a sustainable transition in the corporate world but would also reduce the opportunities for private equity wealth and billionaires to make unfriendly acquisitions.
 
For more information and research opportunities on this topic, please contact Gerard Rijk g.rijk@profundo.nl.