Just a few days after reporting fourth quarter results that were deemed disappointing by investors, Kraft Heinz (KHC) confirmed that it approached Unilever (UN) about tying up to create a leading consumer goods company. Kraft Heinz also confirmed that Unilever rejected its proposal.
Not to be deterred, Kraft Heinz aims to keep pursuing the transaction, which means whatever terms it presented on its initial overture are going to have to be sweetened to get Unilever to do a deal.
That deal is unlikely to come cheaply. Unilever holds a leading position in the consumer goods space, sports a market capitalization of $139 billion, and recorded $55.6 billion in sales in 2016. Kraft Heinz for its part has a market capitalization of $106 billion and recorded $26.5 billion in sales in 2016.
The early verdict from the market is that it likes the idea of these two companies getting together. That is most evident in the fact that shares of KHC, which made the approach, are up 5.0% in pre-market action. Shares of UN, meanwhile, are up 10% as investors are sniffing the prospect of a nice premium.
Kraft Heinz derives roughly 60% of its sales in the United States, versus Unilever, which derives only about 15% of its revenue in the U.S. Accordingly, there is true expansion potential for both companies with a merger since there isn't a huge amount of geographic overlap.
Unilever's product footprint covers the personal care, foods, home care, and refreshment categories while Kraft Heinz is a leader in the food and beverage industry, owning eight brands that have $1 billion+ in retail sales.
Strikingly, shares of Mondelez International (MDLZ) are trading 5% lower in pre-market action, as there had been speculation in the past that Kraft Heinz might look to do a deal with Mondelez. With the writing on the wall today that Unilever is currently the object of Kraft Heinz's merger desire, though, Mondelez is feeling the pinch of being on the outside looking in.
Shares of KHC have risen 18% over the last 52 weeks while shares of UN have dropped 2%.