Consumer Products

Is Warren Buffett About to Get a Lot Deeper Into Food With Kraft Heinz and Unilever?

If there is one man in the business world that just about anyone can recognize, it would probably be Warren Buffett. He has been the world’s richest man and is considered the greatest investors of the modern era. He even managed to get better deals and terms on his bank and financial investments after the recession than the government demanded during their bailouts. Now there is a chance that he and Berkshire Hathaway Inc. (NYSE: BRK-A) could have a major role in the global food market.

Kraft Heinz Co. (NASDAQ: KHC) is looking to acquire Unilever PLC (NYSE: UL). Unilever is actually based in London and also trades in Europe, but the mega-merger would value Unilever around $140 billion. Here is the catch, even after considering that Unilever has rebuffed the offer noting that it undervalues the company: Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-B) already owns a massive stake in Kraft Heinz.

Unilever is not just about food, so there may be future right-sizing or opportunities for the large deal to be paired down by the time all is said and done. Unilever has the following segments: Personal Care, Foods, Refreshment and Home Care. In many ways, Unilever is more of a packaged goods company than it is just a food a company.

Berkshire Hathaway owned a whopping 325,634,818 shares of Kraft Heinz as of December 31, 2016. This was a stake that was previously tied to the acquisition that gave 3G control of the company when Kraft Foods merged with Heinz. The value of Buffett’s stake in Kraft Heinz in today’s dollars, with its shares close to $94, is about $30.6 billion.

Berkshire Hathaway’s 10-Q (quarterly filing) for September 30, 2016 said that the carrying value of this investment was down to $15.711 billion as it had recorded a noncash pretax holding gain of approximately $6.8 billion in 2015.

Unilever’s rejection puts the next month on a clock (see quote below), as U.K. laws are more strict on timing and deal-making. The deal has to come to fruition in a month, or they cannot pursue a deal for about a year.

Kraft Heinz has a market cap of $114 billion, so any acquisition that is not in shares would require a substantial debt load. At that point, the combined company could decide what to do with the non-food operations of Unilever.

Whether Buffett would have any further involvement in a Kraft Heinz and Unilever deal remains to be seen. Berkshire Hathaway just showed more public equity stake changes than we have ever seen, and he already has $30 billion exposure to the company.

Unilever’s confirmed statement on the London Stock Exchange said:

Their proposal represents a premium of 18% to Unilever’s share price as at the close of business on 16 February 2017. 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.

Unilever PLC and Unilever N.V. recommend that shareholders take no action. Further announcements will be made as appropriate.

The proposal received was that Unilever common shareholders would receive $50.00 per share in a mix of $30.23 per share in cash payable in U.S. dollars and 0.222 new enlarged entity shares per existing Unilever share, which valued Unilever at a total equity value of approximately $143 billion.

As at the close of business on 16 February 2017, a mix of $30.23 in cash payable in U.S. dollars and 0.222 Kraft Heinz shares per existing Unilever share would value each Unilever common share at $49.61, representing a premium of 18% to Unilever’s share price.

Unilever’s American depositary shares were last seen trading up 9% at $46.43, in a 52-week range of $38.58 to $48.97. The consensus analyst price target was almost $39.00 prior to this breaking news.

Stay tuned.

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