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Kraft Heinz is still hungry for Unilever after offer rejected

Packaged-food industry rewards consolidation

By Associated Press
Published: February 17, 2017, 11:32pm

NEW YORK — Kraft Heinz is attempting to buy Unilever in a $143 billion deal that would join the U.S. maker of cheeses and lunch meats with the European producer of mayo, teas and seasonings in a global powerhouse.

Unilever rejected the approach and called the price too low, while Kraft Heinz says it’s still interested in a deal. The shares of both companies surged to new highs as investors saw prospects for cost-cutting.

A combination of Kraft Heinz, which sells Oscar Mayer meats, Jell-O pudding and Velveeta cheese, and Unilever, which owns brands including Hellmann’s, Lipton and Knorr, would rival Nestle as the world’s biggest packaged food maker by sales.

That might not lead to noticeable changes on the supermarket shelves. But people’s changing tastes, away from boxed and canned groceries in favor of items that seem fresher or healthier, drive deal-making in the food industry.

Companies like Kraft Heinz, itself formed from two century-old businesses in 2015, are trying to find new avenues for growth amid heightened competition.

Part of the challenge is the proliferation of smaller food makers marketing more wholesome products, which leaves less room for the established companies to drive up sales simply by selling more of their well-known products — or by raising prices, as they have in the past.

“That obviously has its limits,” said David Garfield, head of the consumer products unit at consulting firm AlixPartners.

Instead, companies are digging deeper to find cost efficiencies or tap new markets, Garfield said. That can include mergers to consolidate manufacturing systems, or to give access to distribution networks in regions of the world where a company doesn’t have a big presence.

Those were some of the factors that drove Oreo and Chips Ahoy maker Mondelez International — which was split from Kraft in 2012 — to make a takeover bid for Hershey last year before retreating. And they were among the reasons cited by executives in the Kraft Heinz tie-up, which was engineered by Warren Buffett’s Berkshire Hathaway and 3G Capital, the Brazilian investment firm with a history of taking over companies and aggressively cutting costs.

Bernardo Hees, a 3G partner, has slashed jobs and pursued other savings, some of them granular, as CEO of Kraft Heinz. In a 2015 memo to employees, Hees reminded them to print on both sides of the paper, reuse office supplies like binders and turn off computers before leaving the office to cut down on energy costs.

The company also stopped stocking the corporate office with free Kraft snacks.

Unilever is the world’s fourth-biggest maker of packaged food by retail sales, after Nestle, PepsiCo and Mondelez, and ahead of Kraft Heinz, according to Euromonitor International. In addition to food, it sells health and beauty products such as Axe body spray and Dove soap.

Under pressure

In the meantime, food and drinks companies like Coca-Cola Co., General Mills Inc. and Kellogg Co. are also under Wall Street pressure to slash costs and align with shifting customer preferences.

While mega-deals are rare, they’ve made an array of acquisitions of smaller, faster-growing brands. Campbell Soup is trying to shed its canned-food image, and has bought juice and bagged carrots maker Bolthouse. General Mills now owns Annie’s, Hormel owns Applegate meats and Justin’s nut butters, and Dr Pepper recently bought Bai Brands, a maker of drinks sold as rich in antioxidants.

Shares of Kraft Heinz rose 8 percent Friday. Unilever PLC jumped almost 12 percent.

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