We are blessed with a whirlwind of exciting M&A news at the moment. At the risk of being a party pooper, however, I have reservations about the latest between Kraft-Heinz and Unilever. Yes the latter has rejected a merger offer, but that’s par for the course in takeover negotiations. Rarely is a first approach accepted. If someone is that interested, they’ll be back with a better offer. Which Kraft may well do, as it says it wants to “work towards an agreement” and especially with a mere 18% premium offered being well shy of the 30% average for big deals over the last few years. A 14% Unilever share price jump to fresh all-time highs is thus understandable today, on hopes of a better deal being forthcoming before a 17 March (5pm) ‘put up or shut up’ deadline according to UK takeover rules.

US giant Kraft Heinz has made a merger offer to fellow consumer giant Unilever which would result in one of the biggest groups in the world selling over 400 consumer/household goods to over a third of mankind. Synergies may well be significant and could help offset myriad headwinds (FX, rising commodity prices, regulations, declining sales), but simply on size alone anti-competition hurdles would surely be even more so, not just in Europe but round the world given both groups’ geographic reach. And their size means the deal could be one of the longest to get approval in history.

Kraft (pre-Heinz, pre-2015) also has form in the UK, of the negative type. In 2010 it gobbled up Cadbury, making assurances about job security which were ultimately and almost immediately ignored, a plant closure being blamed  on ‘economic reasons’ (krafty). New rules mean much more information required about a buyer’s intentions from the word go. And the last government has already intervened since to prevent US Pharma giant Pfizer buying out the UK’s own AstraZeneca.

However, in terms of political hurdles it could still be a case of once bitten, twice shy. Theresa May will surely baulk at an opportunistic pounce being made thanks to a Brexit-induced weak GBP making this deal 15% cheaper than it would have been a year ago. Note that a 15% dscount plus the 18% premium makes 33%, much closer to the average premium for ceding control and what the Unilever board would likely want to take to its shareholders, if the board is even interested at all.

Elsewhere on the political front, don’t forget that Unilever is British-Dutch and both nations face major headwinds. The UK is edging towards Brexit and Theresa May would surely like to be seen protecting UK jobs and interests. In the Netherlands there is potential to see Geert Wilders’ Party for Freedom deliver a Trump-like populist win that takes the nation down a similarly anti-immigration and protectionist path, perhaps even more severely. Note that the aforementioned 17 March deadline for a firm and final offer (can be extended under certain circumstances) is just a week after Theresa May would like to trigger article 50 at an EU summit. It is also just two days after the Dutch go to the polls.

This deal may prove less about finances, synergies and corporate merit, and rather more so about politics and competitive hurdles. Don’t forget Europe also faces calls from several member nations to prevent the Chinese from snapping up significant European companies, stealing know-how. The new US president would agree about such a protectionist stance, he is after all demanding that US companies bring back production to within US borders. It’s what got him elected. Unless of course it proves yet another case of one rule for them, and another for us? It’s unlikely this deal can be packaged up quickly, destined to be termed a ‘marmite offer’ – not to everyone’s taste.

That said, the shares could still make a foray above £40 (+8%) on hopes of a better deal and any favourable political spiel. The likelihood is though that the situation represents a short-term trade rather than a long-term opportunity.

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Enjoy your weekend!

Mike van Dulken, Head of Research, 17 Feb 2017