When Warren Buffett sets his sights on a takeover target, it is rare for him to come away empty-handed. But that is exactly what happened when Kraft-Heinz (NYSE: KHC) failed in its acquisition attempt of European consumer products giant Unilever (NYSE: UL) last month.
Buffett, who together with investment firm 3G owns 50% of Kraft-Heinz, was unable to buy Unilever for $143 billion. The offer, which amounted to roughly $50 per share, was rejected immediately by Unilever.
In the aftermath of the rejection, Unilever management remained adamant that the offer deeply undervalued the company.
According to U.K. laws, Kraft-Heinz will have to wait six months before making another offer. But once the waiting period is over, it should try to do just that.
Why Unilever is Worth Acquiring
Unilever has many strong assets and would be a very valuable addition to Kraft-Heinz. Unilever has a long operating history and has grown into one of the largest consumer products companies in the world. It was founded in 1885. Its product portfolio includes 13 brands that each generate $1 billion or more in annual sales.
The first benefit for Kraft-Heinz is that Unilever would diversify its portfolio outside of just food. Unilever has several popular staples brands, including Dove, Axe, Comfort and more. This could provide diversification benefits to Kraft-Heinz.
In addition, Unilever has many high-quality foods brands which could add growth to Kraft-Heinz. This is particularly true when it comes to the emerging markets, where Unilever dominates.
Unilever’s emerging-market sales — which represent nearly 60% of total revenue — increased 6.5% in 2016. This growth was due to 1.1% increase in volumes, and a 5.4% boost from price increases. Such strong pricing power is an indication of Unilever’s brand equity in these markets.
When it comes to consumer staples, the emerging markets have been a tough market, even for industry giants like Procter & Gamble (NYSE: PG). Unilever has unique insight into what consumers are looking for in China, India and other developing markets.
For Kraft-Heinz, this is a perfect time to buy Unilever. The steep drop in the pound versus the U.S. dollar — which almost brought the two into parity — means Kraft-Heinz could take advantage of a once-in-a-lifetime currency advantage.
And, there is a huge opportunity for cost synergies. 3G Capital, one of the backers of the deal and notorious for cost-cutting, is probably foaming at the mouth. Unilever spends heavily on R&D to spur product innovation. There would be huge opportunity for margin expansion if Kraft-Heinz made a successful bid.
Unilever’s Most Valuable Asset? Innovation
Plus, Unilever is a beacon of innovation, in what is normally a stodgy, slow-moving industry. The company has proved it is willing to take action to generate growth.
Consider its $1 billion acquisition of consumer products start-up Dollar Shave Club. This deal raised some eyebrows on Wall Street, because Dollar Shave Club is a relatively untested brand, with little-to-no profitability.
Some saw the Dollar Shave Club deal as a foolish waste of money. But it shows that Unilever isn’t afraid to make big moves, especially when the financing is cheap.
Unilever raised 1 billion euros in a bond sale last year with a zero coupon — meaning the money is essentially borrowed for free.
And, Dollar Shave Club is disrupting the razor market. It is a direct threat to Gillette and other established industry players, and its direct-to-consumer model could represent the wave of the future.
Unilever didn’t stop there. Last year it acquired natural cleaning products maker Seventh Generation for $600 million, and has also been in talks to acquire Jessica Alba’s Honest Co.
Still Time to Buy Unilever Stock
Those who think Buffett and 3G are going to take their ball and go home may be surprised. It would not be a shock to see Kraft-Heinz make a higher bid for Unilever later this year.
With Unilever stock at $50 per share, Unilever would be valued at approximately 25 times its 2016 earnings. This valuation of Unilever represents a slight discount to the average valuation of the S&P 500. Considering Unilever’s brand strength, steady profitability, and opportunities for synergies, it’s clear that Kraft-Heinz’s opening bid for Unilever stock was too low.
As a result, investors looking for a unique opportunity still have time to buy Unilever stock. The stock is undervalued, and also offers a hefty 3% dividend yield.