Marmite deal spreads joy for shareholders

Stocks running out of steam

Markets underwhelmed for a second day with multiple global benchmarks pulling back from record highs. The declines have been light so there’s no justification for alarm. After a five-day winning streak markets are looking a bit tired. If there were to have been any catalyst for the resumption of risk-taking, it wasn’t to be found in President Donald Trump’s press (bashing) conference.

A double-digit surge to record highs in Unilever shares as well as a weaker pound meant the FTSE 100 outperformed European peers. The British pound dipped but there was a mixed reaction in retail stocks after UK retail sales fell for a third month. The prolific pace of consumer spending since the EU referendum was never going to be sustainable month after month.

Marmite deal spreads joy for shareholders

Unilever shares rose over 14% to hit an all-time high after it received and rejected a £112m bid from Kraft Heinz. It would be the second biggest takeover in corporate history and create a mammoth consumer goods company.

Unilever shares kept the bulk the day’s gains, despite the offer being rejected signalling shareholders are confident the deal can still go through. The $50 per share offers amounts to about £40 and Unilever shares spent most of the day above £37.

It’s not surprising to see Unilever reject the first offer, that’s par for the course in takeovers. Unilever shares were at £38 as recently as October so £40 is only a 5% premium on that basis. The statement from Kraft Heinz confirming the offer sounded confident a deal could be agreed. With Warren Buffet behind the scenes, we don’t think Kraft will overpay but could stretch to the equivalent of £45 per share.

We see the attraction from a Kraft standpoint. Merger synergies for such similar businesses should be significant, the combined company’s pricing power will be massive and interest rates are low to finance the deal. Still we question its merit and think if Kraft, or indeed Unilever were looking to buy growth, they’d be better doing so buying into smaller, niche companies. From a Unilever perspective, the prospect of higher input prices in the UK and other parts of the world while retailers squeeze them and other suppliers to keep prices low may be enough to want to sell out.

Should the deal meet shareholder approval, its sheer size will undoubtedly raise questions with regulators. Whichever way you swing it, this deal will mean less choice for consumers. Ultimately we think the deal should pass competition authorities. So long as it doesn’t involve a tax inversion the US should be happy, Theresa May’s industrial strategy has been nowhere to be seen and the EU may force some asset sales but will ultimately let it through.