Madrid, 22 de Septiembre

Unilever vs Kraft Heinz: the sustainability wall


·      How the second largest takeover in history lasted only fifty-five hours.

·      What can both “cost-cutting” and sustainability managers learn.


Paul and Paulo


When Dutchman Paul Polman started as a CEO at Unilever, the maker of Dove soap, Hellmann’s mayonnaise, Ben & Jerry’s ice-cream and Lipton tea, on 1 January 2009, one of his first decisions was to scrap quarterly reports as a practical statement that the company was not interested in short term results and investors.


Since then, Mr. Polman who once considered becoming a priest, established the “Sustainable Living Plan” and led Unilever through a unique sustainability journey. In truth, the Anglo-Dutch company is not the most profitable consumer goods company, but it is probably the most sustainable. Mr Polman is a strong advocate of good practices in sustainability, taking the company tradition started in 1884 to another level, for instance, by promoting the Sustainable Development Goals (SDGs), the Circular Economy and Climate Action.


Brazilian Jorge Paulo Lemann was one of the founders 3G Capital in 2004 and has a formidable story of acquisitions - from Ambev, to InBev, to Burger King and Tim Hortons in 2014 and eventually to Kraft Heinz, the combined makers of Philadelphia Cream Cheese and the famous ketchup in 2015, now worth of $112 billion. The former professional tennis player is the wealthiest man in Brazil and the 26th wealthiest in the world, living in Switzerland since 1999 (more on this later). The world’s most interesting billionaire and 3G are supported by Warren Buffet’s Berkshire Hathaway, another billionaire and even more famous investor.


In contrast with the sustainability evangelist Paul Polman, Jorge Paulo Lemann, is focused on cost cutting to achieve clear profit results. Mr. Lemann, Marcel Herrmann Telles and Carlos Alberto Sicupira made their mark at Banco Garantia, the investment bank they founded in Brazil in the 1970s. After selling it to Credit Suisse in 1998, they formed the private equity firm 3G Capital in late 2004, along with Roberto Thompson and Alex Behring. Mr. Sicupira once said: “Costs are like [finger]nails: they always need to be cut.” You can now even buy t-shirts spreading this philosophy.


Using a strategy called “zero-based budgeting”, 3G Capital companies’ managers must justify their budgets every year from zero. This is not the usual copy, paste and increase everything by “x” percent practice. They also encourage an “ownership mentality” among its managers, paying big bonuses linked to the company’s performance. 3G Capital and Berkshire Hathaway are not exactly champions of sustainability.


Lemann vs Polman in fifty-five hours


Back in January there were rumours that Kraft Heinz was about to make a major acquisition. Although, Unilever was not in this list compiled by Fortune magazine.


It was not a total surprise then, when the Financial Times published on Friday, 17 February that 3G Capital and Warren Buffet were offering “~£40 (~$50) a share” for Unilever, representing a premium of 18% to Unilever's share price at the close of business on the previous day.


Kraft Heinz was then forced to disclose the potential takeover. The $143 billion offer was a historic and unsolicited big move, and yes, more than the Kraft Heinz total value! This combination would represent the second-biggest takeover in history and create the world’s second-largest consumer goods group by sales behind Nestlé.


The same afternoon however, in a “Lemann vs Polman” dispute, Unilever strongly rejected the bid stating that, “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.”


Kraft Heinz then did try to charm Unilever by stating that “Kraft Heinz 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.” Despite the exchange of statements, Unilever shares in London rose 13.4% to a record high.


What happened in the next hours though was the more surprising move: on Sunday afternoon, 55h after the bid was made public, Kraft Heinz said it was dropping the offer. Yes, Mr. Lemann was leaving the court and Mr. Polman won the dispute by W.O. (Well, actually, and according to the Financial Times, the decision to drop the offer was made during a phone call between Warren Buffet and Paul Polman on Sunday: “Just one phone chat is all it took.”)


Both companies then issued a statement saying that “Unilever and Kraft Heinz hereby announce that Kraft Heinz has amicably agreed to withdraw its proposal for a combination of the two companies. Unilever and Kraft Heinz hold each other in high regard.” Moreover, “Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever.” (The reciprocal was not in the statement.)


On Monday, as a result of the Kraft Heinz withdrawal, Unilever’s shares fell by nearly 8%.


Given Jorge Paulo Lemann’s and Warren Buffet’s reputations as winners, this decision was a real surprise. Kraft Heinz was expected to return with a higher offer, but it decided to stop, losing the battle. Why?


Mismatch or “maybe” misunderstanding


From the beginning it was clear that there would be a cultural clash. The New York Times quickly called it an “odd match”. The Guardian reported that in addition to Unilever’s clear reluctance, trade unions had raised fears over losing 9,000 jobs in the UK, and discussions had started with the UK business secretary, Greg Clark. The Guardian also said that Kraft Heinz’s position was further weakened by the fact that rumours of the deal leaked before the US company was ready. This meant Kraft did not have the time to woo key investors before going public with its interest. Unilever shareholders, 70% of whom are long-term investors who have held their shares for more than seven years, are also thought to have been sceptical about the benefits of the proposal.


Did the UK government block the deal? The Guardian wrote that “Downing Street (the UK prime minister’s office) did not confirm reports that the prime minister had ordered top officials to examine the planned takeover of Unilever to see if it could merit government intervention. A spokesperson for the Department of Business, Energy and Industrial Strategy (BEIS), had said it was continuing to monitor the situation closely.”


Warren Buffet gave a more prosaic explanation. In an interview to CNBC, he said that it was actually a misunderstanding when Kraft Heinz Chairman Alex Behring initially mentioned the idea to Paul Polman and got “maybe” as an answer. According to Mr. Buffet, “if a diplomat says yes, he means maybe. If he says maybe, he means no. And if he says no, he's no diplomat. And if a lady says no, she means maybe. And if she says maybe, she means yes. And if she says yes, she's no lady. So [Mr Behring] probably got a maybe and didn't know whether it was coming from a diplomat or a lady.” A pearl of sustainability wisdom!


In any case, and according to people involved in the discussions, there was a firm “no” from the beginning, including in writing. 


Value vs values.


Going deeper, we can see that, in addition to less tangible “cultural” aspects, there is a big difference between Kraft and Unilever: the former does not pay much attention to sustainability issues, while Unilever is the number one sustainability leader since 2011 according to experts and its CEO is a sustainability rock-star, inspiring people in business, government and even NGOs.


“They are radically different cultures,” said Mindy Lubber, chief executive of Ceres, which promotes responsible business practices. “Unilever is the most transparent and open company there is about sustainability being part of their mission. They see it being part of their business proposition. Kraft Heinz, by contrast, is among the companies least committed to sustainability,” Ms. Lubber said. “Kraft Heinz doesn’t even release a sustainability report, which in the year 2017 is shocking for a multinational company.” On Kraft Heinz’s website there is literally one page for sustainability and one page for community involvement.


3G Capital badly misjudged the depth of Unilever’s attachment to its culture and its pursuit of long-term, “sustainable” growth, according to The Economist.


In a 2015 Ceres report that evaluated how major food companies managed water risk, Unilever was the most responsible. Kraft Heinz was among the worst performers.


The way Kraft Heinz treat their employees is also very different from Unilever’s. A quick look on shows that Kraft Heinz gets 2.5 stars (out of 5), 30% would recommend it to a friend and only 28% approve their CEO, Bernardo Hees. Unilever gets 3.8 stars, 81% would recommend it to a friend and a whopping 94% approve their CEO, Paul Polman.


The sustainability wall


Sustainability faces many challenges in its implementation as well as threats to its validity, greenwashing being the most notorious. Sustainability also has clear and well-studied benefits to people, to the planet and to prosperity. The most broadly appealing benefit is that, “high sustainability” companies significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance.”


What is less studied is sustainability as a protection mechanism – a wall – against undesirable acquisitions. Such acquisitions can be unwelcome at a corporate, strategic level, but also detrimental in terms of job creation, environmental protection, free trade and even representative democracy. If the gains from corporate transformations go overwhelmingly to investors and financiers, why should voters support free market policies?


"(The rebuff of Kraft) makes us also wonder if Unilever's focus on sustainability might make it very resistant to any further approach from Kraft," said Royal Bank of Canada analyst David Palmer to Reuters’ Business Insider.


The always sharp Michael Skapinker wrote in his FT column: “the biggest reason why the proposed deal never had a hope of being amicable is the philosophical outlook of Paul Polman, Unilever’s Chief Executive. It is often said of Mr Polman that he is committed to corporate sustainability. This is like saying that Roger Federer is focused on his tennis.”


The sustainability “wall” may be a problem as well when an investor wants to sell its shares, but the initial response from the market was positive: Unilever shares in London rose 13.4% to a record high with the bid news on Friday, declined on Monday, but were still 6.0% above its value before the bid (see picture below). Although long-term investors in “sustainable” companies are normally not too concerned with day-to-day share price movements, the “net” result was not bad.


Reinforcing the wall


Paul Polman knows that Unilever needs to improve its “traditional” bottom line. The Kraft Heinz bid was the perfect excuse for a shake-up at Unilever.


On Wednesday, 22 February, at an amazing speed, Unilever stated: “Unilever is conducting a comprehensive review of options available to accelerate delivery of value for the benefit of our shareholders. The events of the last week have highlighted the need to capture more quickly the value we see in Unilever. We expect the review to be completed by early April, after which we will communicate further.”


Investors were thrilled: the company’s shares went up again by 5.8%, rising back to the same level immediately following the bid.


Unilever is not afraid of copying good practices. They are, since last year, adopting zero-based budget used by 3G Capital, which can actually be a sustainability good practice as well: under this system, 3G Capital managers limit employee use of company printers to 200 pages per month and required double-sided printing, which is great for the environment!




The Kraft Heinz vs Unilever case will be studied for years to come, but it is clear that Unilever’s strong stance towards sustainability helped to protect it against being acquired by undesirable investors.


We may never really know what exactly caused the takeover to be aborted, but it is clear that there are fundamental differences or indeed an “wall” between how 3G Capital/Warren Buffet/Kraft Heinz understand sustainability and the strong emphasis taken by Paul Polman/Unilever and their investors. Maybe the merger would make financial sense, but it would not achieve “long-term growth and sustainable living.”


More sensationally for some, Hyena capitalism received a swift kick from the Unilever giraffe. On the other side, the quick reaction by Unilever to review its business is a key reminder that giraffes can always learn, even from hyenas. Vice-versa, maybe next year Kraft Heinz will start reporting on sustainability!


As a final anecdote, Jorge Paulo Lemann knows first-hand the importance of a well-functioning society. In 1999 he moved to Switzerland, his father’s native country, after gunmen tried to kidnap his three youngest children in Sao Paulo.


At the end of the day, business, investors and their leaders can not succeed in a failing society and unbalanced environment.


Unilever vs Kraft Sustainability Wall
Unilever vs Kraft Sustainability Wall

​​​​​​​​​​​​​​​​​​​​upgr4de your sust4inability perform4nce.