Dove Dermacare Scalp

A Kraft Heinz deal for Unilever could lead to the spinoff of the company’s beauty portfolio, according to several financial sources.

“On the food side, it makes perfect sense for Unilever’s food division to become part of Kraft,” said Martin Okner, managing director at SHM Corporate Navigators. “From a personal-care side, I would see that division being rationalized … [as] a standalone business … or being acquired by a large private-equity group or potentially a strategic buyer with a mass business.”

But some experts saw the other side — noting a deal could potentially lead to Kraft becoming a player in the personal-care products market. Stifel analyst Mark Astrachan wrote in a note that the $143 billion offer for Unilever would give Kraft the option to retain the whole business or sell part to pay down debt.

“If a deal is consummated and [the combined company] does not look to sell any/all [home and personal care] assets, over time we believe it could look to consolidate HPC companies as it has done in packaged food,” Astrachan wrote. That could ultimately put midsize home and personal-care players “in play longer-term,” he noted, naming Colgate-Palmolive, Kimberly-Clark, L’Oréal, Henkel, Estée Lauder and Beiersdorf.

A handful of financial- and beauty-industry sources noted that while the growth and high margins of beauty brands are desirable, even to a food company, that part of the business may be a tough fit for the owner of things like Oscar Mayer, Velveeta and Jell-O. (Unilever’s own food portfolio contains Hellmann’s, Lipton, Ben & Jerry’s, and has better exposure to international markets than Kraft’s brands.)

“What Kraft is mostly interested in is the food business,” said one financial source. “If there was ultimately a deal between Kraft and Unilever, I would not be surprised if they spun the beauty business off into a separate company. For the beauty business to be part of Kraft Heinz would be a net negative,” the source said, noting that Kraft is more about cost control and less about innovation and marketing.

“I don’t think they have any interest in being a beauty player; it’s a very different business,” said another financial source. “It’s like Nestlé trying to buy L’Oréal. These food companies, they see the margins, they see the growth as somewhat desirable but they’re very different businesses.” That same source also noted the difference in innovation strategies between the beauty and food categories. “What have they really done to Heinz Ketchup in 150 years? It’s the same product.”

While buying Unilever would benefit Kraft, sources said, it wouldn’t necessarily bring a lot of benefits to Unilever. Two financial sources said that a merger could potentially result in benefits of scale for Unilever, improving relationships with retailers, but noted that the company already has good distribution in the U.S. mass-market channel.

In order for the scales to tip in Kraft’s favor, it would need to up the price significantly, sources said – with one suggesting it would need to increase by about 20 percent, given the trading multiples of personal-care companies versus food companies (personal-care companies trade at higher multiples, generally). “At some point, depending on how large the premium is, it gets really hard to say no,” another financial source noted.

Kraft confirmed on Friday morning that it had made an unsolicited offer to buy Unilever, which Unilever rejected. Kraft spokesman Michael Mullen issued a statement, saying: “The Kraft Heinz Company notes the recent speculation regarding a possible combination of Kraft and Unilever plc/ Unilever NA. Kraft 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. While Unilever has declined the proposal, we look forward to working to reach agreement on the terms of a transaction. There can be no certainty that any further formal proposal will be made to the board of Unilever or that an offer will be made at all or as to the terms of any transaction.” Under U.K. merger law, Kraft has until March 17 to make a firm offer. Unilever’s “no” was “a response that invites further negotiation,” Okner said.

For Unilever, the proposal comes at a time when the company has worked to build up various product portfolios, including beauty. The business closed a deal for hair-care brand Living Proof in January, following acquisitions of prestige skin-care companies Dermalogica, Murad, Ren and Kate Sommerville. Unilever also recently acquired Seventh Generation, a natural household products business, for $700 million. Unilever also owns Dove and Axe.

“There are three options,” said a source. “Unilever says no, Unilever says yes, or Unilever mergers with somebody else.”

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