CASE STUDY: KRAFT HEINZ PROPOSED MERGER WITH UNILEVER

Spring Semester
BY: SIMON 2024
R. HIRST
By: Simon R. Hirst
March 2022
BERKSHIRE HATHAWAY
 Warren Buffet – The Sage of Omaha

Investment Philosophy

Value investor: aim to buy shares in companies trading at a 25% discount to their
intrinsic value
Price is what you pay. Value is what you get
Invest in what you know
Never compromise on Business Quality
When you buy a stock, plan to hold it forever
Make no attempt to pick the few winners that will emerge from an ocean of unproven
enterprises. We’re not smart enough to do that, and we know it
Beware the investment activity that produces applause; the great moves are usually
greeted by yawns
 Warren Buffet – The Sage of Omaha

Berkshire Hathaway Shareholders’ Meeting in Omaha at the CenturyLink Arena

$1,000 invested in Berkshire Hathaway in 1964 is now worth about $11.6mm

Outperformed the S&P 500 by 11.1% per year from 1965-2015, generating an overall
gain of 1,598,284% compared to the market’s total return of 11,355%.
 Warren Buffet – The Sage of Omaha

“The world’s fifth richest person ($103 billion) continues to make his fortune in
investment and turn it to philanthropy in the grand tradition of Carnegie and
Rockefeller”
“In 2006 he made American history by making the largest ever charitable donation by
an individual – $37bn to the Bill and Melinda Gates Foundation”
 Warren Buffet – The Sage of Omaha

• Buffet has frequently railed against investment bankers and PE firms

When the deal-making machine springs to life, “a lot of mouths with

expensive tastes then clamour to be fed “
“Among them investment bankers, accountants, consultants, lawyers and
such capital-reallocators as leveraged buyout operators”
“Money shufflers don’t come cheap”
 Warren Buffet – The Sage of Omaha

“Warren Buffett embarked on an epic diatribe against investment bankers in his

latest letter to Berkshire Hathaway shareholders, published Saturday.
He mentioned bankers 10 times in the long letter, not once generously.
As The New York Times noted, Buffett painted investments bankers as near sighted
and self-serving and pressing for deals that aren’t always in the best” long-term
interest of their clients”
3G CAPITAL
Jorge Paulo Lemann – Managing Partner of 3G Capital

• Born in Rio de Janeiro in 1939

• Brazilian-Swiss graduate of Harvard University. Played tennis for Brazil
and in men’s singles at Wimbledon
• Founded Banco Guarantia in 1971, a highly successful investment bank
• Net worth of $33 billion – #1 richest person in Brazil and ranks 26th on
Forbes global Rich List
 Jorge Paulo Lemann – Managing Partner of 3G Capital

• In 1998, Lemann sold Banco Guarantia for $675 million to Credit Suisse First
Boston
• In 2000, he founded investment firm GP Investimentos
• In 2004, he founded private equity firm 3G Capital, headquartered in New
York ands Rio de Janeiro
 Jorge Paulo Lemann – Managing Partner of 3G Capital

Investment Philosophy – A New Paradigm

Become the largest shareholder in a public company so as to direct the strategy of a
big business
Utilise the holdings of the other shareholders to facilitate bigger merger deals
Focus only on ULTRA LARGE companies, much bigger than Private Equity could manage
due to their limitations on Debt Capacity in LBOs (will therefore avoid bidding against Private Equity)
Extract material synergies though aggressive cost cutting
Achieving even modest synergies from large companies will equate to massive upside
due to the scale effect of these businesses
Keep merging so as to keep on extracting synergies and achieve optimal pricing power
through market domination
Don’t mind dilution so long as the cake’s is getting bigger through the compounding
effect of synergies
Global deals escape the attention of the Competition Authorities
 3G Capital Acquisition of Burger King

• In 2010, 3G Capital acquired Burger King for an Enterprise Value of $4.0 billion, representing a 46%
premium over its “undisturbed” Share Price
• Burger King had been suffering from high unemployment in its core client base of young males,
and its restaurants were in need of refurbishment
• 31% of Burger King had been owned by private equity firms TPG, Goldman and Bain Capital
Investors, who were relieved to be able to exit
• 3G financed the deal with $2.8 billion of debt financed by JP Morgan and Barclays
• 3G Capital appoints its partner Bernardo Hees as the new CEO of Burger King
 3G Capital Acquisition of Burger King

• 3G Capital sold the “Owned” Burger King restaurants and turned the chain into a “Franchise”
model
• Burger King was a “home run” for 3G Capital, making over $14 billion on its investment
• EBITDA was increased by 60% in Yr 1 (2011)
• In 2012, 3G undertook an IPO of Burger King and sold 29% of their shares in the secondary portion
of the offering
• In 2014, Burger King acquired Canadian restaurant chain Tim Horton’s. After the deal Burger King
was renamed Restaurant Brands International
• Berkshire Hathaway provided $3 billion in preferred equity financing to this deal and acquired 8.4
million shares
Jorge Lemann – BECOMES THE “KING” OF BEER
 3G CAPITAL – BUILDING THE WORLDs #1 BEER COMPANY

1989 1999
3G ANTARCTICA AMBEV
BRAHMA MERGED WITH BRAHMA FOR
ACQUIRED FOR $50 MM $3.94 BILLON (46%)

2004
BECOMES $11.2BN MERGER WITH ENLARGED
AMBEV INTERBREW
I AMBEV
(25%)
N
TURNED T
$50 E
MILLION 2008
ENLARGED ACQUIRED R
INTO A-B INBEV
AMBEV ANHEUSER BUSCH 1 B
$29 FOR $52 BN (CIRCA 26%)
BILLION R
E
W
2015
$220 BN MERGER WITH O INBEV
A-B
A-B INBEV SAB MILLER F - SAB
(CIRCA 13%) B
E
1) Held personally by 3G Founders Paulo Lemann, Marcell Telles ans Carlos Aberto de Veiga Sicupira whio invested additional equity in the deal
L
 The Aftermath of the Mega Mergers

STUPID QUESTIONS:

HOW IS THE WORLD #1 ALLOWED TO TAKE OVER THE WORLD #2?

CAN ONE IMPLEMENT PRIVATE EQUITY PRACTICES IN A PUBLIC COMPANY WITH IMPUNITY?

CUTS 1,400 JOBS AT ANHEUSER-BUSCH IN ST LOUIS IN YR 1

BRINGS IN BRAZILIAN SENIOR MANAGEMENT FROM AB-INVEV TO RUN THE BUSINESS
INTRODUCES “ZERO BASED BUDGETING” = DRASTIC COST CUTTING
THE NEXT CHAPTER: THE NEW BEDFELLOWS
 2013 - WARREN BUFFET/3G CAPITAL ACQUIRE HEINZ

• In 2013, Berkshire Hathaway and Brazilian Private Equity Fund 3G Capital jointly acquired
100% of H.J. Heinz for $28 billion
• Together they invested $8.8 billion in equity: Berkshire Hathaway owned 53% and 3G Capital
47% of the equity of Heinz
• Berkshire Hathaway invested an additional $8 billion in 9% Preference Shares
• The remaining $11.2 billion was financed with bank debt

BERKSHIRE
53%
HATHAWAY
ACQUISITION
OF 100% OF
HEINZ FOR $28
BILLION (with
significant Debt
funding)
3G CAPITAL 47%
 Aftermath of Acquisition of Heinz

The Heinz transaction was a “home run” for 3G and Berkshire Hathaway
• 3G Capital appointed their trusted Brazilian executive, Bernado Hees, (former CEO
of Burger King) as CEO and 90% of Heinz's senior management are either fired or
leave of their own choosing
• 5 plants in the US, Canada and Europe are closed
• Employee reduction of 7,000 jobs worldwide
• Revenues remained flat at $11.2 billion, but Gross Profits rose by $185 million and
Operating Income rose by $746 million due to aggressive cost cutting initiatives
• Berkshire Hathaway’s 9% Preference Shares paid out $720 million in dividends, a
phenomenal return for a low risk company at a time of near-zero interest rates
 2015 – MERGER OF (SPUN OFF) KRAFT FOODS & HEINZ
• In 2015, 3G Capital/Berkshire Hathaway orchestrated the $46 billion merger of Kraft Foods Group and Heinz
• Created 3rd largest food group in North America with revenues of $28 billion. Synergies of $1.5 billion per annum
were anticipated
• Kraft Foods Shareholders got 49% of the Combined Kraft Heinz plus a $16.50 per share special Cash dividend worth
$10 billion – Kraft was bigger than Heinz, so the special dividend to Kraft shareholders facilitated a “merger of
equals”
• Berkshire Hathaway and 3G Capital got control of around 51% of the Group on a combined basis

KRAFT FOODS $10 BILLION SPECIAL DIVIDEND

BERKSHIRE HATHAWAY
SHAREHOLDERS 3G CAPITAL

49% 51%
 2015 – MERGER OF KRAFT FOODS & HEINZ

• Ended up being a very bad deal for Heinz (Warren Buffet and 3G Capital)
• Heinz shareholders only got a 19.9% premium
• The 15% synergies never materialised – morale was destroyed from mass firings to achieve cost savings targets
• Whole deal was predicated on achieving 12x Pro Forma EV/EBITDA Multiple, which declined when growth slowed
• Warren Buffet and 3G Capital had to invest €10 billion of equity capital up-front in order to achieve 51% control
• Kraft Shareholders effectively got $10 billion of their $23.5 billion Equity Value in Cash up front, so massively
de-risked the deal for themselves, while they still got 49% of the upside to the extent that synergies materialised

Bidder: KRAFT
Target: HEINZ
MERGER OF KRAFT AND HEINZ
1 KRAFT 2 HEINZ 7 COMBINED KRAFT AND HEINZ
Stand Alone % Bid Premium 19.9% Exchange Ratio for HEINZ Shareholders 2.7853
Share Price at Deal (Adj. for Spec Div.) 26.03 Stand Alone At Bid Premium Combined KRAFT and HEINZ EBITDA 5,210.0
Number of Shares (million) 588.0 Share Price at Deal 60.48 72.50 % Synergies 15.00%
Equity Value EXCL. SPEC DIVIDEND 15,305.5 Number of Shares 219.7 219.7 Pro Forma Combined EBITDA with Synergies 5,991.5
Equity Value 13,285.6 15,926.0 Weighted Av Undisturbed EV/EBITDA Multiple 12.0 x
Equity Value INCL. SPEC DIVIDEND 25,305.5 Pro Forma EV of Combined Company with Synergies 72,164.1
Net Financial Debt 8,739.0 Equity Value 13,285.6 15,926.0 Less: Existing KRAFT Net Financial Debt (8,739.0)
Enterprise Value 34,044.5 Net Financial Debt 12,074.0 12,074.0 Less: Existing HEINZ Net Financial Debt (12,074.0)
EBITDA 2,370.0 Enterprise Value 25,359.6 28,000.0 Less: Incr in Net Fin Debt for Special Dividend (10,000.0)
EV/EBITDA 14.4 x EBITDA 2,840.0 2,840.0 Equity Injection by Berkshire Hathsaway and 3G Capital 10,000.0
Net Financial Debt/EBITDA 3.7 x EV/EBITDA 8.9 x 9.9 x Less: Pro Forma Net Fin Debt of Combined Company (20,813.0)
Net Financial Debt/EBITDA 4.3 x 4.3 x Pro Forma Equity Value of Combined Company 51,351.1
Pro Forma NetDebt/EBITDA with Synergies 3.5 x
3 SPLIT IN FORM OF CONSIDERATION % Per Share 5 PRO FORMA BIDDER SHARES OUTSTANDING
% Cash Consideration 0.00% - No. of Existing KRAFT Shares 588.0 8 ACCRETION/DILUTION TO KRAFT SHAREHOLDERS
% Share Consideration 100.00% 72.50 No. of New KRAFT Shares Issued to HEINZ Shd'rs 611.8 KRAFT Equity Value Pre-Bid 25,305.5
Pro Forma Combined No. of Shares Outstanding 1,199.8 Special Dividend 10,000.0
4 TOTAL CONSIDERATION in € millions Value of KRAFT's 49% Stake in Combined Company 25,165.4
Cash Consideration - 6 % OWNERSHIP SPLIT KRAFT's Share of Combined Equity Value 35,165.4
Share Consideration 15,926.0 Ownership By KRAFT Shareholders 49.0% % Accretion/Dilution to KRAFT Shareholders 39.0%
Total Consideration 15,926.0 Ownership By HEINZ Shareholders 51.0%
Total Ownership 100.0% 9 ACCRETION/DILUTION TO HEINZ SHAREHOLDERS
HEINZ Equity Value Pre-Bid (Undisturbed) 13,285.6
Cash Investment by Warren Buffet & 3G Capital (10,000.0)
Value of HEINZ's 51% Stake in Combined Company 26,185.7
HEINZ's Total Consideration in Deal 16,185.7
% Accretion/Dilution to HEINZ Shareholders 21.8%
 Merger of Heinz and Kraft Foods

• Berkshire Hathaway’s swapped its 53% interest in Heinz for a 26.8% interest in the Combined Group, The
Kraft Heinz Company
• 3G swapped its 47% interest in Heinz for a 24.2 % interest in the Combined Company
• Berkshire Hathaway and 3G Capital now jointly controlled 51% of The Kraft Heinz Company

BERKSHIRE
3G CAPITAL
HATHAWAY
53.0% 26.8% 47.0% 23.2%

HEINZ SHAREHOLDERS KRAFT SHAREHOLDERS

51% 49%

THE KRAFT HEINZ COMPANY

 Aftermath of the Kraft Heinz Merger

The Kraft Heinz merger was a re-run of the Heinz acquisition on a bigger scale:
• Pledge to cut $1.5 billion in annual costs from Kraft Heinz before the end of 2017
• Primarily focused on work-force reductions along with factory closures and
consolidations. Bloomberg: "The company will lose employees, whole levels of
management, and maybe a few brands, too”
• A McKinsey Report about 3G produced in February 2015 said the firm acquires
companies with marquee brands that need operational improvement. Then it
“purges existing culture and management team” and employs zero-base
budgeting, which requires every department to justify every expense annually
• “It squeezes suppliers and grows by buying more companies, not necessarily by
building ones it owns”. The report says that “while 3G has created tremendous
operational value, its model may present long-term risks” to its brands
KRAFT HEINZ PROPOSED MERGER
WITH
UNILEVER
Hatching the Plan for a Merger with Unilever

• During the Autumn of 2016, 3G Capital and Berkshire Hathaway began an intensive
evaluation of a potential merger of Kraft Heinz and Anglo-Dutch consumer products giant
Unilever
• This transaction had the potential to propel Kraft Heinz to become the #1 consumer goods
company in the world
• Kraft Heinz was faced with a low growth business environment. Unilever faced similar
conditions but was more enlightened in key areas such as sustainability and low salt
products
• Bernardo Hees, 3G Capital’s appointed CEO of Heinz Kraft (and their former appointee at
Burger King) , led the team evaluating potential synergies of the merger

CHICAGO: NEW YORK: OMAHA:

HQ OF KRAFT HEINZ HQ OF 3G CAPITAL & LAZARD HQ OF BERKSHIRE HATHAWAY
 Kraft Heinz and Unilever – The Basic Metrics

It soon became obvious that the potential Comparison of Kraft Heinz and Unilever
synergies of a Kraft Heinz/Unilever merger At "Undisturbed" Share Prices, in $
were massive in scale
Kraft Heinz Unilever
Revenues ($mm) 52,713 56,742
• Unilever had slightly larger revenues than EBITDA ($mm) 7,778 10,470
Heinz Kraft- $56.7 billion versus $52.7 EBITDA Margin 14.8% 18.5%
billion
Kraft Heinz Unilever
• Unilever had a higher EBITDA margin than
Heinz Kraft- 18.5% versus 14.8%
F.D. Number of Shares O/S (mm)
Share Price ($)
HI
1,240
89.05
3,014
42.37
Adj Market Capitalisation ($mm) 110,415 127,716
• Kraft had significantly more Debt ($30.5 Net Debt ($mm) 30,454 18,860
billion versus $18.9 billion) Enterprise Value ($mm) 140,869 146,576
• However, Unilever had 168,000
employees versus only 42,000 for Heinz EV/EBITDA Multiple 18.1x 14.0x
Kraft- this gave enormous scope for cost
cutting
Employees 42,000 168,000
• Furthermore, Kraft Heinz was trading at Revenues Per Employee ($ mm) 1.3 0.3
an 18.1x EV/EBITDA Multiple versus only
14.0x for Unilever Primary Listing NYSE Euronext Amsterdam
• Finally, Kraft Heinz was able to take London Stock Exch
advantage of an historically low U.S. $/£
exchange rate for the UK arm of Unilever Head Offices Chicago, USA Rotterdam
London
PUSSY CAT 3G CAPITAL
Unilever’s Unique Collection of Food Spreads & Other Brands
Unilever’s Unique Collection of Laundry/Home Cleaning Brands
Unilever’s Unique Collection of Personal Care Brands
The Logic of the Kraft Heinz / Unilever Merger

+ =

THOUSAND
+ ISLAND
DRESSING
The Logic of the Kraft Heinz / Unilever Merger

KRAFT HEINZ FOOD RELATED

UNILEVER HOME CARE

UNILEVER FOOD RELATED

UNILEVER PERSONAL CARE
 Proposed Kraft Heinz – Unilever Merger

In February 2017, Kraft Heinz approached Unilever about a potential Offer:

• On 17th February Kraft Heinz made a potential offer to acquire all of the shares of
Unilever PLC and of Unilever N.V in a merger of the companies

• In this proposal, Unilever shareholders would receive:

• $50.00 Per Share in Total Consideration, comprised of

➢ $30.23 Per Share in Cash (60.5%); and
➢ $19.77 Per Share in Kraft Heinz Shares (39.5%)

• The Share Portion of the potential offer equated to Unilever shareholders receiving
0.222 shares in the Combined Entity for ever share they owned in Unilever
Proposed Kraft Heinz – Unilever Merger

BASED ON THESE FEW OUTLINE DETAILS WE ARE ABLE

TO MODEL THE ENTIRE PROPOSED TRANSACTION
Proposed Acquisition Price Per Share for Unilever

• Unilever’s “undisturbed” Share Price was €39.36 per Share on the Euronext
Amsterdam Stock Exchange at the close on the day prior to the proposed offer
• Kraft Heinz’s proposal envisaged an 18% Premium for control
• Adding an 18% Premium to the €39.36 current Share Price gave a proposed
Acquisition Price Per Share of €46.45
HI
• At the prevailing exchange rate of €1 = U.S.$ 1.08, the proposed Acquisition Price Per
Share was $50.00

Undisturbed UNILEVER Share Price € 39.36

Bid Premium 18.0%
Bid Price Per Share In Euros € 46.45
Exchage Rate ($/€) 1.08
Bid Price Per Share In U.S. $ $50.00
PUSSY CAT 3G CAPITAL
Relative Equity Values at Proposed Offer Price

• Unilever has 1.715 billion PLC (“U.K.”) shares and 1.283 billion N.V. (“Dutch”) shares
outstanding = 3.014 billion shares outstanding in total
• Unilever also has 16.1 million shares issuable under in-the-money Share Options
• At $50.00 per Share, Unilever’s Equity was therefore valued at $150.7 billion
• At Kraft Heinz’s share price of $89.05, Kraft Heinz’s 1.240 billion fully diluted shares
outstanding were valued at €110 billion, LESS than Unilever HI
UNILEVER VALUATION AT BID PRICE
Number Bid Price Acqu Value
of Shares Per Share $ Billon
No. of UNILEVER PLC Shares 1,715.0 $50.00 85.8
No. of UNILEVER NV Shares 1,283.0 $50.00 64.2
No. of Sh's Underlying Options 16.1 $50.00 0.8
Total Number of Shares 3,014.1 150.7

KRAFT HEINZ VALUATION AT CURRENT SHARE PRICE

Number Bid Price Acqu Value
of Shares Per Share $ Billon
No. of KRAFT HEINZ Shares 1,217.1 $89.05 108.4
No. of Sh's Underlying Options 22.7 $89.05 2.0
PUSSY CAT
Total Number of Shares 1,239.9 110.4
3G CAPITAL
Mix of Consideration

• Kraft Heinz’s proposal involved Unilever shareholders receiving 60.5% of Total

Consideration in Cash ($30.23 per share)
• Applied to a total Equity Value of $150.7 billion, this equates to $91.1 billion in Cash
• Kraft Heinz’s proposal involved Unilever shareholders receiving the remaining 39.5%
of Total Consideration in Kraft Heinz shares ($19.77 per share)
HI
• Applied to a total Equity Value of $150.7 billion, this equates to $59.6 billion in
Kraft Heinz shares

% CASH / % SHARES
Per Share % $ Value mm
Cash Consideration 30.23 60.5% 91,115.9
Share Consideration 19.77 39.5% 59,588.5
Total Consideration $50.00 100.0% 150,704.4

PUSSY CAT 3G CAPITAL

Exchange Ratio

• In order to calculate the proposed Exchange Ratio, one first needs to know the amount
of Consideration to be received by Unilever shareholders in Kraft Heinz shares
• The proposal envisages $59.6 billion being payable in Kraft Heinz shares
• Unilever shareholders would be receiving Kraft Heinz shares worth $89.1 per share
• In order to receive $59.6 billon of Share Consideration, they would need to be given
HI
669.1 million Kraft Heinz shares (669.1 Kraft Heinz shares x $89.1 per share = $59.6 bn
• Unilever Shareholders would this be receiving 669.1 million Kraft Heinz shares for the
3.014 billion Unilever shares that they currently own = an Exchange Ratio of 0.222

EXCHANGE RATIO
Bidder Shares Received vs Target Shares Owned $ U.S. DOLLARS
Value of Equity Consideration Paid to UNILEVER Sh'drs 59,588.5
KRAFT HEINZ Share Price on Bid Date DIVIDED BY 89.1

No. of KRAFT HEINZ Shares Received by UNILEVER Shldrs = 669.1

Number of Existing Target Shares (Fully Diluted) 3,014.1
Exchange Ratio 0.222x
PUSSY CAT 3G CAPITAL
% Ownership By The Two Sets of Shareholders

• Kraft Heinz has 1.240 billion shares outstanding on a fully diluted basis
• Kraft Heinz will have to issue 669.1 million new shares to Unilever shareholders to pay
for the $59.6 billion of Share Consideration in its proposed offer
• This means that there will be 1.909 billion shares outstanding for the Combined Entity

HI
• Kraft Heinz shareholders will therefore own 64.9% of the Combined Entity (1.240/1.909)
• Unilever shareholders will therefore own 35.1% of the Combined Entity (0.669/1.909)

% OWNERSHIP BY BIDDER/TARGET SHAREHOLDERS Number %

Ownership By Different Parties Post-Deal - Fully Diluted of FD Shares Ownership
Ownership of Combined by KRAFT HEINZ Shareholders 1,239.9 64.9%
Ownership of Combined by UNILEVER Shareholders 669.1 35.1%
Ownership of Combined by New Equity Funding Shdrs - 0.0%
Total Enlarged No. of Shares of Combined Company 1,909.0 100.0%

PUSSY CAT 3G CAPITAL

Uses of Funds

• Kraft Heinz will have to commit $170 billion of “monies” to close the transaction
• It needs $91.1 billion of Cash to pay the Unilever shareholders their Cash Consideration
• It will need to issue $59.6 billion of Kraft Heinz shares to pay the Unilever shareholders
their Share Consideration
• It will need to assume $17.7 billion of Unilever’s existing debt onto its own Balance
Sheet HI
• It will have to pay $1.6 billion of fees and expenses in cash, mostly comprising the up-
front fees associated with new debt financing

USES OF FUNDS
Cash Consideration 91,115.9
Bidder Share Consideration 59,588.5
Target Debt To Be Repaid at Closing 0.0
Target Debt To Be Rolled Over at Closing 17,664.2
Target Pension Fund Topped Up at Closing 0.0
Total Fees & Expenses 1,619.8
Total Uses of Funds 169,988.4
PUSSY CAT 3G CAPITAL
Sources of Funds

• Kraft Heinz need to find $170 billion in total Sources of Funding to close the
transaction
• It is likely that Kraft Heinz only has $3.8 billion of “spare” cash to spend on the
transaction
• The $59.6 billion of Share Consideration is self-financing through the issuance of new
shares – therefore, no cash is involved in this element of the transaction
HI
• It is assumed that the $17.7 billion of Unilever’s existing debt will roll over, and not
have to be repaid (not a definite given the scale of leverage involved in the deal)
• This leaves $88.9 billion of cash to be raised by New Debt Financing, a vast amount

SOURCES OF FUNDS
Cash Utilised 3,844.5
Bidder Shares Issued to Target Shareholders 59,588.5
New Debt Raised 88,891.3
Target Debt To Be Rolled Over at Closing 17,664.2
Other 0.0
New Equity Raised (Sponsor's Equity if LBO) 0.0
PUSSYofCAT
Total Sources Funds 3G CAPITAL 169,988.4
Pro Forma Leverage Ratio

• Kraft Heinz’s Debt-to-EBITDA Ratio will rise from 4.2x to 7.7x

• This level of debt is consistent with a HIGHLY LEVERAGED LBO

Debt/EBITDA
KRAFT HEINZ
4.17 x HI
UNILEVER
1.82 x
COMBINED
7.61 x
Debt/Debt+Equity 36% 50% 55%
Net Debt for Purposes of Enterprise Value 30,454.0 18,860.1 142,049.8

PRO FORMA NET DEBT

Net Debt of Bidder 30,454.0
Net Debt of Target 18,860.1
Reduction of Cash Balances 3,844.5
New Debt Raised 88,891.3
Debt Repaid at Closing 0.0
Pro Forma Net Debt 142,049.8

PUSSY CAT 3G CAPITAL

What Does This High Leverage Mean?

• Warren Buffet is unlikely to be comfortable with a Debt/EBITDA Ratio as high as 7.4x on

a medium long-term basis

• Kraft Heinz could subsequently raise additional EQUITY from the Stock Market in a
Primary Offering, using the proceeds to pay down the Acquisition Debt

HI
• …..but this would be dilutive (usually priced at a discount to the current share price) and
is therefore unlikely to be countenanced by either Warren Buffet or 3G Capital

AS A RESULT, THE DIVESTITURE OF WHOLE DIVISIONS TO

STRATEGIC BUYERS WOULD BE A HIGHLY LIKLEY OUTCOME

➢ Either the Unilever Personal Care Products Division; or the

➢ Unilever Home Care Products Division

PUSSY CAT 3G CAPITAL

 Lazard’s Advisory Team to Kraft Heinz on Unilever Transaction

WILLIAM RUCKER – CEO, LAZARD LONDON

WILLIAM LAWES – Newly Joined MD, LAZARD LONDON ALEX HECKER – MD, LAZARD
FORMER SENIOR PARTNER OF FRESHFIELDS BRUCKHAUS DERINGER CO-HEAD OF CONSUNER RETAIL INVESTMENT BANKING
Immediate Issues Relating to Kraft Heinz Proposed Offer for Unilever

• 18% Control Premium was offered in the Initial Proposal – almost a

derisory level compared to the customary 30% (this was not a merger of equals)

• Unilever Shareholders would own only 35% of the Combined Entity due
to receiving 60.5% of the value in Cash, not Shares

• Fixed Rate of Exchange in U.S. $: 100% of Exchange Rate Exposure left

with Unilever Shareholders
Unilever–A Dual Listed Company

• Unilever has a special status as one of the world’s few “Dual Listed” companies

UK/Netherlands UK/South Africa

Reed Elsevier Investec
Royal Dutch Shell Mondi
Unilever

Rest of World
ABB Group (Sweden/Switzerland)
Allied Zurich (UK/Switzerland)
Australia/UK Carnival Corp (Panama/UK)
Brambles Dexia (Belgium/France)
BHP Billiton Eurotunnel (France/UK)
Rio Tinto Group Fortis (Belgium/Netherlands)
Nordbanken (Sweden/Finland)
Smithkline Beecham (UK/US)
Thomson Reuters (UK/Canada)
 Dual Listed Companies

• A Corporate Structure in which two companies function as a single operating entity without
actually merging - “Dual Liasted” is a misnomer, since many companies are listed on multiple stock exchanges
• It is in effect a “synthetic” merger – two company’s “stapled” together with legal agreements
• Operate through an Equalisation Agreement in which they agree to share all risk and rewards,
dividends etc, in a fixed proportion
• Normally share a single Board of Directors and an integrated management structure
• Retain separate Stock Market listings, although the shares should trade in tandem with each other
• Retain their separate sets of shareholders (British PLC shareholders and Dutch N.V shareholders for
Unilever)
• Highly complex and favourable tax arrangements

EQUALISATION
AGREEMENT
British Reaction to Kraft Heinz Proposed Offer for Unilever

NEVER LET A DEAL GET IN THE WAY OF A GOOD PINT

Anglo Dutch Relations – History Talks

The British and the Dutch were frequently at war with each other but signed a
peace treaty in 1674 and William of Orange later became the joint monarch of Britain
Dutch Reaction to Kraft Heinz Proposed Offer for Unilever

Famous Dutch fictional character, Hans Brinker, with his finger in

the dyke, preventing a catastrophic flood
HOLLAND

3G Capital
Berkshire Hathaway
Dutch Culture – How Will The American Offer Be Greeted?

Option 1

“Roll Out the

Welcome Mat”

Option 2

“No Ketchup at
any price.
We’ll stick to
our
Mayonnaise,
thanks”
This is What a Friendly Offer Looks Like

HI

$50.00 Per Share: $30.23 in Cash and $19.77 in Kraft Heinz Shares
PUSSY CAT 3G CAPITAL
Presentation of Kraft Heinz’s Unsolicited Offer

Alex Behring (Brazilian Co-Founder

of 3G Capital and Chairman of Kraft HI
Heinz) met twice in London with
Paul Polman, Unilever’s CEO

In the second meeting on, 17th

February 2017, Behring unveiled
Kraft Heinz’s unsolicited proposal

PUSSY CAT 3G CAPITAL

What Happened Next….

• Over the next 48 hours there was a vociferous reaction to Kraft Heinz’s proposal

• Unilever’s Board issued a statement: “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.”

• The Company insiders argued that the low-ball offer “deserved to be forgotten” and stressed that a
HI
deal would mean a clash between Unilever’s long-term approach to shareholder returns and 3G’s
short-term private equity model

• Prime Minister Theresa May ordered top officials to investigate the proposed deal to see if it posed
any potential threats to the country's economic interests, the Financial Times reported

•
BYE
The “Ghost of Irene Rosenfeld” came back to haunt the corridors of power in the U.K.
DON’T KNOW IF WE’LL BE BACK
• Unilever’s radical British trade union Unite said it “is seeking an urgent meeting with Unilever
senior management where we will seek assurances that the company will resist this predatory
takeover by Kraft Heinz”

• Unilever’s shares rose by 13.4% to £37.97, a record high, but below the indicative $50 (£47)
proposed offer by Kraft Heinz – a sure indication that the market did not think the deal would
happen, and that no revised offer would be sought by Unilever’s Board
PUSSY CAT 3G CAPITAL
Beating a Hasty Retreat

HI

BYE
DOUBT IF WE’LL BE BACK

Kraft Heinz Probably Incurred $100 million+ in Fees in a largely fruitless exercise
PUSSY CAT 3G CAPITAL
In England There Is A Famous Expression....

POACHER

….TURNED ….GAMEKEEPER

PUSSY CAT PREDATOR

Warren Buffet – Berkshire Hathaway

PUSSY CAT PREDATOR ?

Jorge Paulo Lemann

PREDATOR WORSE
....In The Case of Unilever, It Might Have Been The Other Way Aroun

GAMEKEEPERS

….TURNED…. POACHERS

PUSSY CAT PREDATOR

3G CAPITAL BERKSHIRE HATHAWAY
Unilever Came Well Prepared

Dual Bear Trap Patented by Unilever in 1872

“N.V.” “PLC”

PUSSY CAT 3G CAPITAL

But Was Unilever too Hasty to Dismiss the Heinz Kraft Proposal?

PUSSY CAT 3G CAPITAL

 What Might A Revised Bid Have Looked Like?
• Bid Premium raised from 18% to 30% - increases Bid Price to $55.08
• Switch Consideration around to offer 65% in Kraft Heinz Shares and 35% in Cash
• Exchange Ratio increases from 0.222x to 0.402x (Unilever shareholders receive 0.402 KH shares for every 1
Unilever shares that they own. But they receive $33 billion less Cash Consideration

Undisturbed UNILEVER Share Price € 39.36 UNILEVER VALUATION AT BID PRICE

Bid Premium 30.0% Number Bid Price Acqu Value
of Shares Per Share $ Billon
Bid Price Per Share In Euros € 51.17
No. of UNILEVER PLC Shares 1,715.0 $55.08 94.5
Exchage Rate ($/€) 1.08 No. of UNILEVER NV Shares 1,283.0 $55.08 70.7
Bid Price Per Share In U.S. $ $55.08 No. of Sh's Underlying Options 16.1 $55.08 0.9
Total Number of Shares 3,014.1 166.0

DEAL DYNAMICS % CASH / % SHARES

Transaction Type PARTIAL MERGER Per Share % $ Value mm
% Cash Consideration 35.0% Cash Consideration 19.28 35.0% 58,110.6
% Share Consideration 65.0% Share Consideration 35.81 65.0% 107,919.7
Total Consideration $55.08 100.0% 166,030.3

Value of Equity Consideration Paid to UNILEVER Sh'drs 107,919.7

KRAFT HEINZ Share Price on Bid Date 89.1
No. of KRAFT HEINZ Shares Received by UNILEVER Shldrs 1,211.8
Number of Existing Target Shares (Fully Diluted) 3,014.1
Exchange Ratio 0.402x
 What Might A Revised Bid Have Looked Like?

• Ownership would be more consistent with a Merger of Equals 50.6%/49.4% Kraft Heinz/Unilever
• Only $56 billion of New Debt required vs. $89 billion in the initial proposal
• Debt/EBITDA Ratio rises to 5.8x vs. 7.4x in the initial proposal
• Sale of non-core business still likely, but smaller in scale and less urgent

% OWNERSHIP BY BIDDER/TARGET SHAREHOLDERS Number %

Ownership By Different Parties Post-Deal - Fully Diluted of FD Shares Ownership
Ownership of Combined by KRAFT HEINZ Shareholders 1,239.86 50.6%
Ownership of Combined by UNILEVER Shareholders 1,211.85 49.4%
Ownership of Combined by New Equity Funding Shdrs - 0.0%
Total Enlarged No. of Shares of Combined Company 2451.7 100.0%

SOURCES OF FUNDS
Cash Utilised 3,844.5
Bidder Shares Issued to Target Shareholders 107,919.7
New Debt Raised 55,514.7
Target Debt To Be Rolled Over at Closing 17,664.2
Other 0.0
New Equity Raised (Sponsor's Equity if LBO) 0.0
Total Sources of Funds 184,943.0

KRAFT HEINZ UNILEVER COMBINED

Debt/EBITDA 4.17 x 1.82 x 5.79 x
Debt/Debt+Equity 36% 50% 39%
Net Debt for Purposes of Enterprise Value 30,454.0 18,860.1 108,673.3
How Would The Economics Have Looked?

• Assuming the revised offer, a weighted average trading EV/EBITDA multiple of 16.0x and significant
revenue/cost synergies, Unilever Shareholders would have been $85.7 billion better off (+45.4%) if
they merged with Kraft Heinz rather than standing alone
• If the Combined Entity traded at Kraft Heinz’s 18.1x EV/EBITDA multiple, Unilever shareholders would
have been +61.5% better off by accepting a revised offer, adding $116 billion to their 49.4% share of
the Combined Entity’s equity value
• This assumes a constant exchange rate – the numbers would be even more favourable if the £ and the
€ recover against the $, which they could well do

YEAR 5 PROJECTED VALUATION ANALYSIS EV/EBITDA Multiple

U.S. $ millions 16.0 x 18.1 x
Comined EBITDA Before Synergies 21,910 21,910
Estimated Revenue & Cost Synergies 7,637 7,637
Combined EBITDA With Synergies 29,547 29,547
EV/EBITDA Multiple 16.0 x 18.1 x
Projected Combined Enterprise Value 473,171 534,798
Less: Projected Combined Net Debt (67,653) (67,653)
Projected Combined Equity Value 405,518 467,145
UNILEVER Shdr's % Ownership of Combined 49.4% 49.4%
UNILEVER Shdr's Share of Combined Value 200,442 230,903
Plus Future Value of Cash Consideration 74,165 74,165
Future Value of Total Consideration 274,608 305,069

Stand Alone Projected UNILEVER Equity Value 188,904 188,904

PUSSY CAT
Accretion/Dilution vs Stand-Alone Value 45.4% 61.5% 3G CAPITAL
Müntefering: Schwärme von Heuschrecken

Franz Müntefering, head of the German SPD, once verbally attacked the
behaviour of private equity firms whose profit-maximising strategies were seen
as a long-term threat to “our democracy”. He described them as “swarms of
locusts that fall on companies, stripping them bare before moving on.”

Schwärme von Heuschrecken, die auf Unternehmen fallen und sie vor
PUSSY CAT dem Umzug entblößen 3G CAPITAL
Schwärme von Heuschrecken

“Most private equity deals have been done on a professional basis, and have
had to take account of the board’s sensitivities”

“Ironically, it was the attempt by the ethical elite (Berkshire Hathaway/3G

Capital) to Take over Unilever that was most botched, and went totally against
Buffet’s core moral principles”

“The execution of Kraft Heinz’s attempted Unilever deal was flawed on almost
every level” Simon R Hirst

PRIVATE
EQUITY
BANKER
could be a saint
after all

PUSSY CAT “Money shufflers

3G CAPITAL don’t come cheap”
The Accident-Waiting-to-Happen Syndrome
“wealth can be a corrupting influence – reaping the low hanging fruit can quickly erode
one’s long-held principles”
“success can breed over-confidence and mask the traps that lie ahead”
“powerful people are tough to say no to, and their internal procedures often lack the
normal checks and balances”
“It not until there’s a major calamity that the obvious weaknesses are exposed”
“lack of geographical diversity creates a shuttered view”
“either the bankers were hoping for the best and chasing the fees, or they were woefully
ineffective at giving appropriate warnings to their client

PUSSY CAT 3G CAPITAL

So What Next ?

• Unilever shareholders may still get a Home Run over the next 24 months

• Unilever’s Board will almost certainly implement Kraft Heinz’s strategy by themselves:
➢ Job redundancies and other cost cuts which are long overdue
➢ Liklehood of large divestitures of non-core businesses
➢ Higher leverage
➢ Potential for a Special Dividend
➢ Possibility of an alternative large industry merger
➢ “Anyone-But-Kraft-Heinz” will seem to be their best friend

Despite 3G’s PR machine pronouncing unlimited opportunities ahead, the road will be rather
tougher for Kraft Heinz and its 2 major “non-Private Equity” backers
➢ Kraft Heinz has blown its cover and is likely to be an “unwelcome guest” at the merger table
➢ Kraft-Heinz’s growth rate has slowed and the easy pickings are over
➢ Kraft Heinz is so large that only massive transactions will move the needle
➢ Warren Buffet is likely to be a restraining factor upon his Brazilian friends, having ended up
following aPUSSY CATwas, upon reflection, in conflict with his traditional
path that 3G CAPITALmoral compass
So What Next? A Tale of Two Cities: 2016-20

Unilever vs KraftHeinz Share Prices

Indexed to 100: Last 5-Years 2016-2020

180

160

140

120

100

80

60

40

20

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61

Kraft Heinz Unilever

PUSSY CAT 3G CAPITAL