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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Unilever shares hit record high after rejecting Kraft Heinz's £114bn takeover approach - as it happened

Containers of “Ben & Jerry’s” ice cream, one of Unilever’s many brands.
Containers of “Ben & Jerry’s” ice cream, one of Unilever’s many brands. Photograph: Matt Dunham/AP

Moody's: Deal is credit-negative for Unilever bonds

Hang on.... Moody’s have just warned that it might take a dimmer view of Unilever’s credit worthiness, if this deal happens.

Ernesto Bisagno, Senior Analyst at Moody’s, explains:

“Whilst it is still early days, Kraft Heinz’s offer for Unilever’s shares would be credit negative for Unilever’s bondholders, as 2017 pro-forma combined leverage would likely rise significantly - excluding cost savings and synergies - from the moderate 2.0x Unilever currently shows on a standalone basis.

Also, Kraft Heinz’s current rating is Baa3 and thus five notches lower than Unilever’s A1 rating.”

Unilever shares close at record high

The London stock market has closed the week..and Unilever shares have ended the day up 13.5% higher at £37.97.

That’s a new alltime closing high, and not far from the £40 per share which Kraft Heinz has proposed paying, in an offer that has electrified the City of London.

Over on Wall Street, shares in Kraft Heinz have also jumped - they’re up 7% right now. That actually pushes up the value of the cash-and-share deal.

But with Unilever standing firm tonight, its US suitor faces paying an even bigger price to get one of of the world’s biggest ever mergers off the ground.

Unilever’s share price over the last two decades
Unilever’s share price over the last two decades Photograph: Thomson Reuters

Chris Beauchamp of IG believes this story has much further to run....

For now the approach has been rebuffed, and in relatively robust language from the tone of Unilever’s response. Until today Unilever shares had steadily underperformed the FTSE 100 over the past six months, left behind by more glamorous sectors such as mining, but today has seen that situation reverse.

Backed by Warren Buffett, Kraft is likely to return for another tilt at the prize, with a bid of this size unlikely to have been made without careful consideration.

Here’s our latest news story on the potential deal:

Thanks for reading, and have a great weekend. GW

While Unilever’s shares have soared, the company’s bonds have taken a slip.

Investors are worrying that it might take on a lot more debt if the Kraft Heinz deal goes though, potentially weakening its credit-worthiness.

Hat-tip to the Wall Street Journal’s James Mackintosh:

John Colley, a Professor of Practice at Warwick Business School, believes the unions are right to worry about job cuts.

He says:

The main benefits from such a deal would be major cost reduction as head offices and regional management could be merged. There would also be some purchasing benefits from increased buying power.

Kraft Macaroni and Cheese box sign logo
Kraft Macaroni and Cheese box sign logo

Changing attitude to food has put pressure on Kraft Heinz to pursue a merger, argues Mark Jones, a solicitor and food and drink industry expert at Gordons law firm.

And that’s partly because younger people are keener on freshly cooked foods than previous generations, he argues.

“Consumer choices are changing, we are moving away from processed foods and towards fresh. Millennials will soon surpass the baby boomer generation as the largest living generation and millennials are not keen on processed food.

“The packaged food businesses have seen their sales growth slow in the last few years and because of this they are looking at ways to preserve margins. One way to do this is merge and take the benefit of economies of scale. The deal would make a lot of sense”.

Others spreads, drinks and sauces are available, of course...

Unite union: Univer must resist this 'predatory' approach

The Unite union, which represents Unilever workers, is urging the company to reject Kraft Heinz’s ‘predatory’ takeover bid.

It fears that a takeover would lead to job cuts, and a drop in quality, as the US firm tries to squeeze costs out.

Unite national officer Rhys McCarthy says:

“Unite is seeking an urgent meeting with Unilever senior management where we will seek assurances that the company will resist this predatory takeover by Kraft Heinz.

“Unite members make household products which are much loved by UK consumers. Kraft Heinz and their backers’ reputation for cost cutting, we believe, will lead to great brands being harmed through job cuts and a never ending drive to push costs down.

“This takeover bid, is we fear, driven by a desire for a growth in sales, not through product innovation and maintaining great brands, but by gobbling up a major competitor and slashing costs to generate a quick buck.

“Unite does not believe this takeover is either in Kraft Heinz workers’ interests or those of Unilever and that ultimately it will lead to jobs losses and poorer products for consumers.”

Antitrust regulators might have issues with such massive companies merging, says ETX Capital’s Neil Wilson.

Would competition authorities let this one through?

It could come up against a number of hurdles as it would create a giant in the sector. EU regulators in particular could be against it.

Naeem Aslam of Think Markets has warned that jobs could be lost, and consumers could also suffer, if the deal goes through.

He says:

We anticipate that this has a lot to do with Brexit as well. Theresa May has not triggered the Brexit yet, the effects of this have started to surface. Perhaps, predators see a lot of blood and opportunity and falling sterling has produced enough blood on the street for firms around the world to look and cash on opportunities. They are coming out with big bazookas and trying to make deals which we have not seen. You can not blame them because tt is cheap for them and the time is right. So we do not think Kraft Heinz is going to back down anytime soon.

If the deal does see the daylight, this simply mean more job loss for UK and more pain for consumers as competition will erode.

Steve Clayton, fund manager at Hargreaves Lansdown, believes Kraft Heinz will need to raise its offer substantially, to get enough Unilever shareholders onside.

‘This is cheap money meeting industrial logic. Putting portfolios of brands together can create huge synergies across marketing, manufacturing and distribution, even before you think about cutting the combined HQ back to size. Kraft Heinz are attempting a massive push on the Fast Forward button, for to acquire the sheer scale of brands that Unilever represents through one-off acquisitions could take decades. With debt cheap and abundant right now, Kraft have spotted their opportunity.

Unilever were clearly in no mood to sell, having spurned the first advance, but Kraft Heinz are not put off. But what will Unilever’s shareholders have to say? The long term boost to portfolios that Unilever has delivered has been enormous. A short term premium today is no compensation for losing the growth that Unilever could produce for decades to come. So to win over a majority of Unilever’s shareholders, we think Kraft Heinz will need to dig very deep indeed.’

This chart shows how Unilever shares surged to fresh record highs, driving its value towards the $143bn on offer from Kraft Heinz.

Unilever bid: instant reaction

Dutch TV journalist Durk Veenstra suspects that Unilever would accept a higher offer:

Bloomberg’s Dan Wilchins says the fall in sterling since last summer has made UK-listed companies vulnerable to offers.

Corporate band and reputation adviser Spencer Fox suggests the two firms aren’t a good fit:

(Unilever CEO Paul Polman is a vocal advocate for corporate responsibility and running a sustainable business).

So, we now know that Kraft Heinz has offered to pay around $50 per Unilever share. That’s around £40, at the current exchange rate.

Unilever’s shares are now trading around £37.65 per share, up from £33.60 this morning.

Unilever: Approach fundamentally undervalues us

Newsflash: Unilever has just issued a statement to the City, confirming that it rejected Kraft Heinz’s approach.

The Anglo-Dutch firm reveals that Kraft Heinz offered to pay $143bn (or nearly £115bn), in a mixture of cash and its own shares.

But Unilever insists this isn’t enough, and says it doesn’t see any point in talking further.

Here’s the full statement:

Unilever notes the recent announcement by The Kraft Heinz Company (“Kraft Heinz”) that it has made a potential offer for all of the shares of Unilever PLC and Unilever N.V.

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.

Updated

Warren E. Buffett.

Warren Buffett, one of the world’s richest men, is right at the heart of this merger bid.

Buffett’s Berkshire Hathaway group engineered Heinz’s takeover of Kraft in 2015, working with Brazil’s private equity giant 3G Capital. He’s now the largest shareholder of the company.

Kraft Heinz has been cutting costs and boosting cash flows since it was created, which looks to be preparation for another merger.

Shares in Kraft Heinz have jumped by over 3% in pre-market trading in New York.

Between them, Unilever and Kraft Heinz control many of the world’s most popular consumer brands.

Unilever produces washing powder (Persil and Surf), spreads (Flora and Bertolli), ice cream (Ben & Jerry’s, Magnum and Cornetto), personal care items (Dove, Sure, and Vaseline), and cleaning products (Domestos and Cif).

Kraft Heinz also has its fingerprints all over your kitchen, from ketchup, soup and Philadelphia cheese to Kool-Aid and Capri Sun.

If this deal goes through, it would be one of the largest takeover deals ever.

Unilever’s market capitalisation has surged to over £100bn since the FT broke the news that Heinz Kraft has made an approach.

No foreign company has ever paid that much for a British firm.

The biggest takeover ever took place in 2000, when mobile network giant Vodafone swept on German rival Mannesmann in a deal worth £112bn, or $180bn, at the time.

Shares in Unilever have surged by 11% after Kraft Heinz confirmed that it has approached the company about a merger.

They’ve jumped from £33.60 to over £37 per share, as traders bet that a deal will be done - despite Unilever’s initial rejection.

Kraft Heinz makes takeover approach to Unilever

Big breaking news..... Kraft Heinz, the food giant, has approached Anglo-Dutch consumer chain Unilever over a merger.

Kraft has just issued a statement to the City, revealing that it approached Unilever with a proposal to merge the two companies.

That approach has been turned down...but Kraft hasn’t given up. It says it hopes to reach an agreement with Unilever’s management.

Here’s the full statement:

The Kraft Heinz Company (“Kraft”) notes the recent speculation regarding a possible combination of Kraft and Unilever plc / Unilever NA (“Unilever”).

Kraft confirms that it has made a comprehensive proposal to Unilever about combining the two groups to create a leading consumer goods company with a mission of long-term growth and sustainable living. While Unilever has declined the proposal, we look forward to working to reach agreement on the terms of a transaction. There can be no certainty that any further formal proposal will be made to the Board of Unilever or that an offer will be made at all or as to the terms of any transaction.

That speculation was sparked by the Financial Times’s Alphaville site, which reported this morning that an approach had been made.

.

More to follow!

Updated

City traders are betting that the retail sales slowdown has cut the chances of UK interest rates rising anytime soon.

The pound fell as low as $1.2388, down almost a cent.

Money is pouring into UK government bonds too, pushing down the yield (interest rate) on 10-year gilts to a three month low. That means the bonds are changing hands at the highest price since November -- another sign that rates are likely to stay low.

Spending falls as households "feel the pinch"

There’s an argument that the fall in UK consumer spending over the last few months could be a good thing, in the long run at least.

After all, economists have long worried that Britain’s economy was too reliant on its nation of shoppers. Perhaps a rebalancing is now taking place...

Hannah Maundrell, editor in chief of money.co.uk, argues that UK households are sensibly adjusting to the Brexit vote.

“It might not be what businesses want to hear but I’m pleased we’ve started to reign in our spending a little after our big splurge at the end of the year.

We can’t keep on spending like there’s no tomorrow as it’ll cause massive problems later on. Households are going to feel the pinch as prices start to rise and we all need to be a little more sensible with our money. Sorting out a decent budget and being measured with your spending is the best thing to do right now.

Mihir Kapadia, CEO of financial firm Sun Global Investments, also sees some positives:

Sluggish wage growth and rising inflation would mean we no longer may be able to depend on consumers keeping the economy buoyant.

However this could also be a good thing in the long term. Former Chancellor George Osborne always emphasised that the economy had to rebalance away from borrowing, consumption and imports to saving, manufacturing and exports. This rebalancing requires greater saving and less consumption and therefore the consumers have to retrench. This will be negative for the economy in the short-term but could mean a more balanced UK economy in the longer run.”

Ranko Berich, head of market analysis at Monex Europe, also fears that Britain’s consumers spending is faltering, following the drop in retail sales over the last three months.

January’s report represents the first fall in three month on three month sales since December 2013, and suggests the underlying trend is indeed taking a turn for the worse.

The prospect of a sustained dip in consumer spending is a sobering one for sterling, which has been supported by strong macro data during the political uncertainty of the last few months.”

Updated

Today’s retail sales figures provide clear evidence that consumer spending will be squeezed this year, says Andrew Sentance, senior economic adviser at PwC.

A sharp turnaround in the inflation environment has put a sharp brake on the growth of retail spending - and we are likely to see more of the same as we move through 2017 and next year.

Sentance also points out that consumers are no longer benefitting from cheap fuel -- prices for petrol have jumped in recent months, leaving less money for other goods.

“In 2015 and the first half of last year, falling prices on the high street and at the petrol pump boosted the volume of retail spending. Shop and motor fuel prices were falling by 2.5% to 3% a year over this period and this supported 4.5%-5% growth in the volume of retail sales.

“By contrast, this January we have seen a rise in prices in the retail sector - which are now nearly 2% up on a year ago. Not surprisingly this change in the inflationary trend has squeezed the growth in the volume of retail spending to just 1.5% compared with last year.

.

Today’s figures show that the slump in sterling since the Brexit vote is now hitting the retail sector, argues Neil Wilson of ETX Capital.

All the numbers today show a downward trend and the anticipated knock to consumer spending from rising inflation may already be evident.

Households are clearly starting to feel the effects of the pound’s fall in value and this will only get worse as prices rise over the coming months as hedging contracts expire.

The CBI’s principal economist, Alpesh Paleja, is also worried by the fall in UK retail sales -- it could show that consumers are cutting back.

UK Retail sales stumble: What the experts say

The slowdown in retail spending over the last quarter shows that consumers are tightening their belts, argues Howard Archer of IHS Global Insight:

Reuters’ Jamie McGeever flags up that December’s retail sales were the third-worst in the last two decades:

Samuel Tombs of Pantheon predicts that retail sales will keep falling this year, as retailers hike prices.

This chart shows the big picture in UK retail - prices are going up, and the amount of stuff we can buy is going down.

UK retail sales figures

The pound has fallen sharply after today’s retail sales missed forecasts, shedding over half a cent to $1.242

The pound vs the US dollar today
The pound vs the US dollar today Photograph: Thomson Reuters

UK retail sales fall unexpectedly

Breaking: UK retail sales have fallen for the third month running, fuelling concerns that consumers are cutting back as inflation rises.

The volume of goods sold online and on the high street shrank by 0.3% in January. That follows a downwardly-revised 2.1% plunge in December.

That’s a big shock for the City - most economists expected retail sales to bounce back last month.

The Office for National Statistics also found that retail sales fell by 0.4% over the last quarter, compared to the previous three months - the first fall since December 2013.

UK retail sales

ONS statistician Kate Davies says:

In the three months to January 2017, retail sales saw the first signs of a fall in the underlying trend since December 2013.

The evidence suggests that increased prices in fuel and food are significant factors in this slowdown.”

The report also shows that inflationary pressures are buffeting shoppers -- average store prices (including fuel) increased by 1.9% on the year, driven by more expensive petrol.

Details and reaction to follow!

Updated

All the major European markets have dipped this morning, as the aftermath of Donald Trump’s press conference ripples through trading floors.

European stock markets this morning

Trump’s ding-dong battle with the press corps yesterday was big on jaw-dropping quotes (uranium is ‘nuclear weapons and other things’, for example), but didn’t contain much to reassure investors.

Jeremy Cook of currency trading firm World First explains:

President Trump’s press conference yesterday was a return to the policies and performance aesthetics of his candidacy. Accusations and grandstanding apart, the performance offered us little substance on any economic matters more than he has already told us.

If candidate Trump returns to the podium continually while a Congress works to enact tax reform then the relationship between the two are all important. He needs Congress to build stuff but he does not need them to start tearing things down.

Angus Gluskie, managing director of White Funds Management in Sydney, was also unimpressed, saying (via Reuters):

“Trump’s erratic performance in the press conference has had a destabilising influence on investor confidence.”

Updated

The Toshiba Corporation logo at the company’s headquarters in Tokyo.

It’s been another bad day for Japanese conglomerate Toshiba, as the crisis at its nuclear division rumbles on.

Shares in Toshiba slumped by another 10% today, after S&P warned that it could sharply downgrade its credit rating if it restructures its debts. Such a move would be seen as a “selective default”, the agency said.

Earlier this week, Toshiba revealed a $6.3bn writedown on the spiralling cost of two nuclear power station projects in America, following mass cost overruns and delays.

A quiet start to trading in London has seen the FTSE 100 dip by just 7 points, to 7270.

Traders have noted that the S&P 500 and the Nasdaq both fell last night, although the Dow did hit a record high for the sixth day running.

Naeem Aslam of Think Markets says investors are sensibly banking some profits, as Donald Trump may struggle to deliver on his tax reform pledges.

US equities closed lower last night after their massive rally and the stocks over in Asia traded mostly in the lower territory as well. Investors are confident about the economic health of the biggest economy in the world, the US, and are optimistic that upcoming fiscal and tax plans are going to have a more positive impact on the economy.

Having said that, many do believe that the market is getting ahead of itself and there is just too much optimism about how far Mr Trump can go with his fiscal and tax plans as he still needs full approval from congress. The chances of that are not that great and this is what makes some investors a little pessimistic. Mr Trump applauded himself in a tweet yesterday by mentioning that the run in the stock market was mainly due to investor confidence which comes on the back of his upcoming tax plan. Of course, the question is how long can you chew on this, and if your words are not backed up with action, you run a massive risk of disappointment.

The agenda: UK retail sales in focus

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Has the rally fizzled out? After hitting record highs on Thursday, the world’s stock markets are looking edgier today.

Investors are digesting Donald Trump’s remarkable press conference, in which he blasted the press and defended his administration’s early progress - but didn’t flesh out his promises of tax reforms and fiscal spending.

That has pushed some Asian indices into the red, with Japan’s Nikkei closing down 0.6% and China and Hong Kong also losing ground.

It’s left us looking at a very quiet start to trading in London.

But that could change at 9.30am GMT, when the latest UK retail sales figures are released.

Economists are expecting to see that retail spending recovered in January, up around 1% in the month (including petrol), after falling unexpectedly by 1.9% in December.

A weaker reading might indicate that consumers are now feeling the pinch from higher inflation, which has forced real wage growth down to a two-year low.

RBC Capital Markets believe rising prices will cause a slowdown in the aisles.

If consumers are having to pay increased prices, volume growth will be harder to come by than when there was deflation in the sector. Volume growth has already slipped from over 7% y/y in October to 4.3% y/y in December, with the consensus estimate for January data today looking for a dip below 4% y/y.

Also coming up today...

The Greek government and its creditors will continue talks over its bailout today. However, there’s no real hope of a breakthrough in time for next Monday’s meeting of eurozone finance ministers.

This uncertainty could weaken the euro, warns analyst Tony Cross of TopTradr:

We’ve been here many times before and a compromise will more than likely be found, but tensions are going to be heightened in Germany with the elections looming and continued distributions to other parts of the Eurozone continuing to annoy the electorate – even if they have by all accounts done very well out of the imbalance in recent years.

EU officials are now suggesting that a deal could come in March...

....the omens from the football field aren’t encouraging for Greece’s finance minister, Euclid Tsakalotos, though.

Otherwise, it could be a quiet end to a lively week....

Updated

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