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Is a Unilever (UL)-Kraft Heinz Merger Deal in the Cards?

Zacks

Per Susquehanna's Pablo Zuanic, Unilever PLC UL is likely to become a takeover target of Kraft Heinz Co. KHC once again. Incidentally, Unilever had rejected Kraft Heinz’s acquisition offer in February. However, both the companies have been maintaining silence regarding the news.

It is to be noted that Kraft Heinz has not made any acquisition since the failure of the Unilever buyout deal. Also, per StreetInsider.com, Kraft Heinz is likely to invest $30 billion, which was put in by Warren Buffet, the CEO of Berkshire Hathaway Inc. Per the British law, a company must wait for six months to reconsider a takeover. Thus, the deal is anticipated to take place in mid-August.

The rumored deal, which is expected to be valued around $200 billion, will be more expensive as compared with the original offer price of $143 billion, which was considered undervalued by Unilever and was thereby rejected.

Zuanic also projects that the deal could be financed in part by selling Unilever's cosmetics and ice cream businesses, and Kraft Heinz's coffee, frozen foods, Oscar Mayer and baby food.


Unilever: A Strategic Buy

Unilever seems to be a strategic fit for Kraft Heinz, as Kraft has been taking several expansion initiatives in the food industry and is focusing on building home and personal care platform, in which Unilever has solid command. Notably, Unilever has inked several deals in the past to strengthen its position in home care and personal care products and generate substantial revenues.

The Anglo-Dutch company Unilever has been trending higher on the back of its recent strategic business reviews, aiming to deliver profits and boost shareholders value amid sluggish growth and increasing competition in the global packaged goods industry.

Unilever is also divesting its underperforming businesses and has reportedly decided to sell its shrinking spreads business, including brands like Flora and Stork butter, in April. Furthermore, the company announced that it would buyback shares, hike dividends, raise cost savings target as well as combine foods and refreshments businesses.

Unilever has also undertaken a program called Connected 4 Growth to reduce costs, under which individual expenses are reviewed during each accounting period rather than rolled over.

On a year-to-date basis, Unilever’s shares have rallied 32.7%, outperforming the Zacks categorized Soap & Cleaning Materials industry’s 13.3% gain and the broader Consumer Staples sector’s 7.4% growth. The upside was driven by the company’s efforts to improve business.

However, the company continues to struggle with declining volumes in Brazil and a soft economy in Russia. Further, it is witnessing softness in the developed markets of North America and Europe with little signs of recovery. Additionally, it has been delivering weak results for the last few quarters due to sluggishness in the emerging markets, which account for about two-thirds of the company’s total revenue. Though the emerging markets offer robust long-term prospects, they are generally volatile.

What If the Deal Gets Through?

If the deal happens, it would mark the third-largest merger of all time. The combined entity would generate revenues of $82 billion, making it one of the world's biggest packaged food maker in terms of sales after Nestle. It would also cut costs significantly.

Unilever currently carries a Zacks Rank #2 (Buy).

Unilever PLC Price, Consensus and EPS Surprise

Unilever PLC Price, Consensus and EPS Surprise | Unilever PLC Quote

Other Stocks that Warrant a Look

Other top-ranked stocks in the food industry include Church & Dwight Company, Inc. CHD and The Clorox Co. CLX, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Church & Dwight has a long-term earnings growth rate of 9.17%, Clorox has a growth rate of 6.78%.

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