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Challenge keeps us sharp

10 April 2017 by Henry Ker

Takeovers: Challenge keeps us sharp - read more

Unilever calls for stronger protections and Government intervention following Kraft Heinz’s attempted takeover

Back in February, a Warren Buffett-backed Kraft Heinz proposed an audacious takeover of fellow consumer goods manufacturer Unilever. The bid, valued at £115 billion or an 18% premium on Unilever’s share price at the time, was labelled by Unilever as ‘fundamentally undervaluing’ the company. It went on: ‘Unilever rejected the proposal as it sees no merit, either financial or strategic, for Unilever’s shareholders.’

The following day a joint statement was issued, stating Kraft Heinz had ‘amicably agreed to withdraw its proposal for a combination of the two companies.’ It continued: ‘Unilever and Kraft Heinz hold each other in high regard. Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever.’

The fallout from the proposal, however, seems to stand in contrast to that ‘amicable’ announcement. Unilever has called for the Takeover Code – the principles by which the Takeover Panel regulates potential acquisitions – to be strengthened, and urged the Government to go further in safeguarding ‘national champions’.

Protecting UK business

Unilever argues that a company defending a potential takeover needs more time than the current 28-day period allowed, suggesting it offers little opportunity for a robust defence to be organised in the face of a potential acquirer, which may have been planning its move for over a year.

The 28-day period was actually introduced as a defence for target companies – the period, known as ‘put-up or shut-up’, is designed to limit the damage an endless rumour mill about a takeover can cause. Basically, once interest in a bid is expressed, the acquirer has 28 days to make a formal bid or back off, with no subsequent bid allowed by the potential acquirer for six months. The reform came about in 2010 following Kraft’s last high-profile UK acquisition, Cadbury, which it pursued for five months.

“A well-run target company of a certain size should undoubtedly have contingency plans in place for a potential takeover ”

The argument for more time to plan a defence in the face of a meticulously organised takeover is certainly understandable. There is also the fact that historically, the UK has been particularly open to M&A activity. Research by Dealogic suggests that since 1997, British firms have been involved in a quarter of all cross-border M&A activity – whether as buyers or targets.

However, a well-run target company of a certain size should undoubtedly have contingency plans in place for a potential takeover. It is also unlikely a bid will ever come completely out of the blue; rumours and information enquiries will have alerted the company in advance and, if the proposal is likely to be negatively received, offered some opportunity to prepare a counter-case for shareholders.

Proper strategy

In July 2016, during the launch of her campaign to become Leader of the Conservative Party and Prime Minister, Theresa May brought up the topic of takeovers by foreign companies. Discussing how ‘the Government almost allowed AstraZeneca to be sold to Pfizer’ in 2014, she labelled Pfizer as ‘the US company with a track record of asset stripping and whose self-confessed attraction to the deal was to avoid tax’ and suggested the Government should have greater powers to intervene.

Currently, under the 2002 Enterprise Act, the Government can only intervene in a takeover because of three issues: financial stability, media plurality and national security. May instead proposed ‘a proper industrial strategy’ that would not step in automatically, but should be capable of defending a sector vital to the country’s economy – such as pharmaceuticals and AstraZeneca.

Public interest

How that ‘proper industrial strategy’ would look is another matter. The current mooted proposal would be to add a fourth criterion to the three in the Enterprise Act: ‘critical national infrastructure’.

Sir Vince Cable called for a ‘public interest test’ to be added back in 2010, following Kraft’s reneging on a commitment to save jobs after its Cadbury takeover. Kraft’s actions by themselves caused a change in the Takeover Code; commitments made during the acquisition process are now legally binding. Unite, Britain and Ireland’s biggest trade union, brought up this case after the Unilever approach, as it commented: ‘It shows the need for a “Cadbury rule” which takes into account the issues like jobs and consumers in these circumstances, so it’s not just down to how deep someone’s pockets are, to throw money at shareholders.’

“Subjectivity means the policy will never be as effective as its noble ambitions intend”

However, as with any time where ambiguous terms such as ‘critical to national infrastructure’ or ‘public interest’ are used, how they are applied in reality is far from clear. Suddenly an element of subjectivity, no doubt influenced by lobbying from various sides, means the policy will never be as effective as its noble ambitions intend.

‘Public interest’ could also apply to badly-run organisations as well as prospering businesses. Sometimes with struggling companies, hard decisions and compromises have to be made. There may be an accidental danger of ‘protecting’ a struggling business from an acquisition, when that takeover could help save the business – all in the name of public interest.

Strategic review

There are, in fact, positive aspects that arose from Kraft Heinz’s attempted takeover. Despite all the posturing about ‘predatory takeovers’, as Unite described it, Buffet painted it as more of a gentle enquiry as to how an offer would be received (indeed, he managed to land himself in hot water as he explained the process via an ill-judged analogy about ‘the difference between a diplomat and a lady’). Alongside this, it must be noted it failed – and failed quickly – with little detrimental effect on either company (although Unilever’s share price yo-yoed a little).

“Companies may feel they have to be seen to ‘do something’ and rush headlong into a mistaken enterprise”

Following the attempted takeover, Unilever announced a strategic review ‘of options available to accelerate delivery of value for the benefit of our shareholders’. It explained that the attempted takeover highlighted ‘the need to capture more quickly the value we see in Unilever’.

Offload brands

Since that announcement, there have been suggestions Unilever will look to offload around £6 billion worth of brands – namely its struggling margarine assets such as Flora and Stork – in order to enhance shareholder returns. This may prompt the more cynical to ask why, if this move makes such business sense, it has not been proposed before.

But Unilever has recognised it cannot be complacent when there are ‘predators’ out there, and has looked to raise its game. The takeover attempt was the proverbial kick up the backside.

In all industries, pressure and challenge, within reason, keeps companies at the top of their game and promotes competitiveness – business, like every form of competition, should not be overly protected, otherwise companies will never realise their full potential.

However, it is also important to ensure that companies do not have a knee-jerk reaction to a potential takeover. Companies may feel they have to be seen to ‘do something’ and rush headlong into a mistaken enterprise. As with anything, caution and temperance must be advised.

Henry Ker is Editor of Governance and Compliance

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