Unilever’s $20bn Acquisition of Bestfoods
Deal Overview
Acquirer: Unilever
Target: Bestfoods
Total Transaction Size: $20.3bn
Closed Date: 4th October 2000
On June 7th, 2000, Unilever and Bestfoods announced it had reached an agreement to acquire Bestfoods for a total of $20.3bn. Unilever purchased all outstanding shares, at $73 per share, and assumed Bestfoods’ $4.0bn of debt. Unilever accounted for the deal using the purchase method, acquiring net assets of €7.7bn, and goodwill valued at €17.8bn to be amortised over 20 years.
The acquisition was one of the most important deals within the fast-moving consumer goods space at the time, not just based on market value, but also the IP, brand awareness, and consumer bases at stake. The joint firm would have monopolised markets across almost all of Europe, and Unilever navigated regulatory antitrust scrutiny efficiently. Both firms operated complementary models, and various strong examples of horizontal synergies can be seen throughout the integration.
Bestfoods brought with it an efficient, curated portfolio, having recently shed any operations outside of food production and grocery products. Unilever’s offering instead spanned a wide range of consumer goods, including cosmetics and household products. Unilever’s workforce far outweighed Bestfoods’ smaller base – 255,000 and 48,000 respectively – where only 1/3 of the latter’s employees were US-based.
The merged company’s estimated revenue for 1999 stood at $52.3bn, with operating income of $6.2bn. Annual savings were estimated at $750m, increased from $500m at the time of initial offer.
Acquirer Overview: Unilever
Founded: 1929
CEO: Antony Burgmans / Niall FitzGerald
Market Cap: £32.70bn
EV: £32.28bn
LTM Revenue: £27.0bn
LTM EBITDA: £3.01bn
LTM EV/Revenue: 1.2
LTM EV/EBITDA: 10.7
Unilever was created in 1929 through the merger of two rivals chasing the same raw materials: Margarine Union, a Dutch margarine producer, and Lever Brothers Limited, a British oil-based soap producer owning a network of vegetable oil plantations and processing sites across West Africa, Asia, and the Pacific. Their union combined complementary strengths in branded consumer goods and shared oil-based inputs, now in control of entire supply chains.
Unilever expanded rapidly through adding new product lines and acquiring popular world brands. By the early 1980s, it ranked as the world’s 26th largest business, but its vast catalogue of operations had become unwieldly, and growing competition from Procter & Gamble and Nestlé triggered the need for a strategic shift towards ‘core product areas’.
Across the following decade, the company reshaped its holdings through major acquisitions, such as Brooke Bond, maker of PGTips, (1984) and Chesebrough-Pond’s, maker of Vaseline and Pond’s (1986), and had shed all chemicals operations. Unilever also become the largest ice-cream producer in the U.S through its acquisition of Breyer’s from Kraft in 1993.
By 1999, Unilever had established strong product lines, with 13 official corporate categories focused in three core areas with leading brands – Home Care (Domestos, Comfort, Cif, Surf), Personal Care (Dove, Lux, Rexona), and Foods (Lipton, Magnum). The company owned patents for a wide range of emulsifiers, fragrances, and food technology; annual spends of >£500m on R&D supported the development of proprietary formulations, such as novel cholesterol-lowering spreads (Flora ProActiv) and Dove’s skin-sensitive soap bars.
The company’s investment and growth were underpinned by its scale of operations and global reach. Unilever distributed goods across 150 countries, with around 50% of turnover and generated annually in Europe, followed by ~20% in North America and ~15% in Asia & Pacific. Operations were supported by a global workforce of ~250,000 employees and factories in over 90 countries, where deep local-market presences and domestic supply chains allowed the company to offer tailored products to regional tastes. Following gains from corporate restructuring, cost savings programs (such as the disposal of 23 businesses in 1999), and synergies across product lines, operating margins had reached a new record of 11%. Acquisitive growth, e.g., 27 small acquisitions in that year alone, allowed Unilever to maximise production from its integrated supply chains, with particular strengths in oil, fats, and dairy suppliers.
Despite margin records, economic instability squeezed growth; Latin America endured difficult conditions following the Brazilian currency crisis of early 1999, and recovery was slow in Asia, the Pacific, and Russia, following crises in 1998-98. Foods suffered sales volume declines despite profit improvements, and overall volume growth stood at a low 1%. Investor inclinations were also changing with tech-stock boom.
Competition had intensified in the diversified global FMCG (fast-moving consumer goods) sector, and Unilever occupied this space alongside primary competitors Procter & Gamble and Nestlé. From a Porter’s Five Forces perspective:
Existing rivalry: high, due to strong global incumbents with similar global reach
Threat of new entrants: moderate; brand equity, supply chain strength and distribution scale created higher barriers to entry, but local markets faced competition from domestic producers & local cost advantages
Threat of Substitutes: extremely high, given the substitutability of consumer goods (large ranges available of tea, soaps, detergents) and globalisation increasing access to new products & markets
Bargaining power of Buyers: rising persistently, particularly due to the rise of the internet / e-commerce, causing lower shoe-leather costs for procurement and less sticky producer-retailer relationships
Bargaining power of Suppliers: low; Unilever’s volume purchasing gives leverage over commodity suppliers, and the company controlled much of its raw material processing & production
Whilst the list of main competitors was likely to remain stable, the fast-moving nature of the sector and the substitutable nature of consumer goods created concerns for Unilever. The company’s 1999 Annual Report notes that the falling sales and profits in Latin America, driven by economic conditions, were worsened by ‘competitive challenges in laundry’ – namely P&G’s Tide and Ariel detergents, who were Unilever’s main threat within Home & Personal Care sectors. Nestlé was responsible for key Foods brands, including Nescafé, KitKat, Perrier, and Häagen-Dazs, sharing geographies in similar European, North American & Latin American regions.
Ultimately, Unilever had established a portfolio of strong global brands, integrated supply chains, and ample cash flow, and had demonstrated strong integration skills through its acquisition-led growth. However, growth numbers indicated a clear need for change, and Unilever’s share price had slid from 680p in early 1999 to 340p by February 2000.
Target Overview: Bestfoods Inc.
· Founded: 1913
· CEO: Charles R. Shoemate
· Market Cap: $20.3bn
Bestfoods’ humble roots roots began from a wildly popular product even today, when in 1913, Manhattan deli owner Richard Hellmann decided to commercialise his popular homemade mayonnaise. By the 1920s, Hellmann’s had become a pantry staple, and the brand was subsequently acquired by Postum Foods, maker of popular coffee substitute Postum and competing condiment ‘Best Foods Mayonnaise’.
Postum Foods (later Best Foods) began its international expansion in the 60s, first advertising in Europe, and later across Latin America, and grew its product lines through numerous acquisitions – notably the producer of Skippy peanut butter.
This rapid growth made Postum Foods an ideal target and caught the eye of American corn production and processing giant Corn Products Company, who hoped to enter the grocery products business. The firms merged in 1958 and was renamed CPC International Inc, reflecting intentions to shift away from corn refining toward branded packaged foods.
Under the short tenure of CEO James R. Eiszner in the 80s, the company had surpassed $4bn in annual sales, invested over $400m in growth projects, and acquired 17 new consumer food brands. By 1997, ex-US sales had far exceeded domestic sales, and CPC’s consumer foods business had met targets to surpass its corn operations. The company’s final president, Charles R. Shoemate, decided to entirely divest its corn processing business to focus better on foods, and the company was suitably renamed – Bestfoods.
By 2000, the Bestfoods empire boasted a strong portfolio of flagship brands built almost entirely from its purchases, such as Knorr, Skippy, Hellmann’s, Mazola, and Kraft baked goods – these 50+ acquisitions costing an aggregate almost of $1bn. Despite offering a much smaller range of brands than competitors in the sector, or where Bestfoods did not lead, its brands ranked in the top tier or were strong regional challengers, benefitting from strong consumer loyalty and awareness.
Latest annual financial data available pulled from Bestfoods’ 2Q99 report shows 6-month sales stood at $4.4bn, with regional contributions in ascending order approximately: Europe (44%), North America (20%), Latin America (12%), Asia (4%) (remaining contributions from globally calculated baking business). This illustrates Bestfoods’ broad but globally uneven portfolio, with sales strengths in Europe and North America.
Bestfoods owned manufacturing and processing plants worldwide, including a Knorr plant in Japan and vegetable oil manufacturing facility in Puerto Rico, facilitating local supply sourcing across its emerging markets in Latin America and Asia, which were seeing consistent year-on-year growth. As of 2Q99, six-month gross profit margins stood at 46.9%, higher than previous time periods, and the company notes this was due to improvements in pricing and better efficiencies, as well as lower commodity costs, reflecting strong cost & technical capabilities from its inventory, plant capacity, and procurement structures. Bestfoods also reported objectively fairly strong operating margins, at 14.2% as of 2Q99, indicating good profitability.
Bestfoods’ strong financials were supported by well-managed and limited commodity risk. Despite utilising key raw materials, including soybean oil, peanuts, and wheat, the cost represented only a small percentage of its total cost of sales, and strong customer loyalty and shelf presence meant it possessed strong cost pass-through abilities, being able to ‘generally recover in higher selling prices’.
Unsurprisingly, Bestfoods shared similar difficulties with Unilever amongst the conditions of the late-90s. Its filings from 1999 note currency weaknesses, particularly in Latin America, had eroded the value of net sales by a few percent, as well as hurting sales volumes. However, Bestfoods’ operations were nowhere near those of Unilever’s, meaning despite its financial strengths, it was tougher to succeed in a highly competitive and substitutable goods market. Despite similar market positioning, smaller cash flows meant the company would struggle further to invest in R&D and growth.
Overall, compared with other global giants, Bestfoods was strong in specific categories but lacked the portfolio breadth and scale that competitors possessed.
Motivation
Unilever’s share price slump and stagnating growth called for change, and in February 2000, Unilever announced its new Path to Growth (henceforth PtG) strategy, spearheaded by co-chairman Niall Fitzgerald. The plan set out definite targets of achieving annual growth of 5-6% and operating margins of over 16% by 2004, through:
Focusing on ‘Unilever’s leading brands’
Reduction of around 100 manufacturing sites and
Workforce cut by 25,000 by 2004
The strategy was set to cost €5bn over the following 5 years, and yield annual savings of €1.5bn, including a further €1.6bn in savings from a move to global buying and change in procurement strategy.
PtG aspired for rapid growth, and Bestfoods offered a way to meet these targets. Unilever had an established operational framework, but the responsibility to meet shareholder expectations, particularly given the attractive, rapid growth that tech stocks was offering in parallel.
Unilever pushed for the acquisition as it recognised Bestfoods as a tool to facilitate its existing growth plans, rather than an add-on. Announcing the merger in June 2000, N.W.A. FitzGerald, Chairman Unilever PLC, and A. Burgmans, Chairman Unilever N.V., said, “This transaction will accelerate Unilever towards the achievement of our Path-to-Growth objectives — it makes a good plan better. The complementary nature of our geographic coverage and our combined product portfolio together with Bestfoods’ strong foodservice operations, will enable us to further raise our growth ambition”.
The main motivations for the acquisition can be categorised as follows:
1. Scale
By the end of the 90s, global grocery retail had consolidated rapidly, controlling unprecedented shelf-space leverage. Walmart, already amongst the world’s largest retailers, acquired Asda in 1999, providing renewed control over US and UK markets, and France’s Carrefour, a top retailer in Europe, had entered Southeast Asia.
Bestfoods added over $8bn of sales, and this new combined market share pushed Unilever to a position “rivalled only by Nestlé as the world’s largest food maker”. The acquisition materially increased Unilever’s bargaining power with concentrated supermarket buyers; with Bestfoods’ added volume, the PtG’s targets of saving €1.6bn through global buying became achievable.
2. Synergies
Achieving the increased operating margins of up to 16% set out in the PtG relied on core operations and supply chain simplification. Bestfoods was strong in manufacturing and procuring, particularly given its commercial relationships developed through the Corn Products and oil refining businesses, which allowed Unilever to consolidate its food manufacturing. Unilever was able to shift its food production to Bestfoods’ efficient existing infrastructure and shed factories, freeing its balance sheet from some depreciating assets.
3. Geographic Diversification
Both companies offered geographic complementary strengths and expertise which would aid Unilever, and Bestfoods, in addressing its structural weaknesses. Whilst UK-based Unilever certainly had a global presence, weaknesses persisted in the North American region, which possessed the world’s largest packaged-food market. US sales stood consistently at an approximate 20% of worldwide sales each year, far outweighed by European sales of up to 50% annually.
American-founded Bestfoods similarly excelled primarily in European markets (up to 45% of total sales) , however it owned the largest branded baking/baked-goods business in the US and further distributed some of the country’s most popular products, strengthening Unilever’s brand and shelf presence in North America.
Bestfoods also had a Latin American presence, where Unilever struggled to maintain its hold over amongst the growing popularity of competitor P&G’s detergent products. On the contrary, Unilever had greater success in Asia, and Bestfoods could benefit from Unilever’s close community relationships and distribution networks. Bestfoods further had an established foodservice channel, where Unilever could leverage its large range of condiments, tea beverages and other culinary products through to expand its culinary sectors.
4. Efficient use of capital
Unilever’s 1999 Annual Review acknowledges the sharp fall in share price the previous year and its Total Shareholder Return (TSR) ranking, which fell to 13th place out of 21 similar firms, missing the company’s annual benchmark of remaining within the top third ranks. Turnover that year was flat, and underlying growth of 1% was offset by currency volatilities, but the company was still producing large FCF (Free Cash Flows) annually, reporting FCF of €4.2bn (as of ’99).
Unilever was also well-placed credit-wise to pursue debt-financed growth opportunities; a net gearing ratio of just ~23% in 1996 (97-99 data unavailable) reflects stable, but very low-risk, operations.
Addressing short-term concerns, the company had already issued a special dividend and share buybacks, but to achieve growth in line with targets, Unilever required long-term investment. Bestfoods, a fast-moving and high cash-flow business with pre-acquisition operating margins of up to 15%, provided the growth opportunities Unilever needed.
5. Bestfoods’ Motivation to Sell
The acquisition provided Bestfoods an equally logic argument, particularly given its historical experience with successful acquisitions, and further in a market which was experiencing heightened M&A activity from competitors (notably Procter & Gamble and Philip Morris). Bestfoods were threatened similarly by increasing buyer power & global supermarket concentration, and its exposure to the consumer foods sector had dramatically increased following the full divestment of its corn production business. Its flagship brands were valuable, but difficult to grow globally whilst operating on a smaller scale.
Deal Navigation
Initially, Unilever had offered $66 per share, which Bestfoods rejected, believing this to be an undervaluation. Bestfoods moved craftily, reportedly kicking off negotiations with other potential acquirers – namely competitors Heinz, Campbell Soups, and Diageo. Unilever repositioned, and its next offer for $20.3bn was accepted.
Once Bestfoods agreed, the deal navigation process was relatively smooth and efficient. Unilever faced some complexities during regulatory negotiations with Brussels, which were resolved within 3 months. The deal was debt-financed, mostly through short-to-medium term debt.
1. Regulatory & Legal
Negotiations with regulators, namely the European Commission, kicked off shortly after the deal announcement, with Unilever keen to remove barriers to the impending integration. Brussels had flagged anti-competition concerns due to product overlaps in nearly 150 separate national food-related markets and mandated concessions worth approximately £350m in annual sales.
Sectors that would be most affected were noted as instant and regular dry soups, dry side dishes, cold sauces, hot sauces, jams, and other culinary products, affecting almost all countries in the EEA. Food service sectors in the Nordic countries and the UK and Ireland, catering for hotels, cafés, and restaurants, were also exposed.
Unilever swiftly agreed to the sale of some of its flagship brands, including Oxo, in favour of Bestfoods’ Knorr, as well as Lesieur, Batchelors, McDonnells, Bla Band, and Royco. By late September, the company was granted regulatory clearance for the acquisition of Bestfoods, with the total estimated value of the divestment package sufficient to address the EC’s concerns.
2. Financing Structure
Unilever financed its $20.3bn offer to Bestfoods through a mix of short-term debt and a bond issuance, and assumed $4.0bn of Bestfoods’ debt. Cash offers are attractive, particularly in a bearish market – Unilever would experience a lower tax burden and avoids shareholder dilution, which would have worsened its pre-deal share price slump / its attempt to recover TSR, and both parties benefit from a simpler transaction.
In June, Unilever first established a standby revolving credit facility of $22bn between four banks used as immediate bridge/backstop financing while debt was issued. Initial financing private placements and FRN (floating rate notes), with geographical weighting between USD and EUR based on the joint food business. This commercial paper was mostly refinanced following the issuance of $7bn of US Global Bonds, and additional Eurobonds of €2.75bn and some smaller amounts in Q4.
Net gearing rose to 73.0% in 2000, and net interest cover compressed to 5.3x.
Integration (2000-2001)
Leadership and board alignment
Bestfoods CEO Shoemate, whose business acumen was particularly noted when he successfully drew an extra $2bn from Unilever, was retained to oversee the success of the integration. He remained on the Advisory board until 2002, reflecting leadership alignment and extraction of key talent.
Operating model compatibility
Both firms operating as ‘diversified global FMCG’ firms. Similar reliance on local supply networks with roots in local communities, and vertical ownership over production.
Early and disciplined integration, aligned with thesis
Unilever upheld strong discipline and timeliness in its negotiations with Brussels, mitigating regulatory risk efficiently. This was maintained in the execution of the announced divestment; by January 2001, the sale of all brands had been agreed for a debt-free price of €1bn to various companies across the EU.
Tailored integration approach
In August 2000, Unilever announced a new corporate category structure, slimming down to just two divisions, Foods and Home & Personal Care, signalling an approach to a more focused portfolio. This facilitated a simple integration of the joint Unilever Bestfoods business into Unilever’s existing structure and aligned with the existing PtG guidance to simplify operations to increase performance on its leading brands.
Figures from the following year reflect success in this area; leading brands were producing 84% of total turnover, annual growth of 5%, and were expected to hit 95% by 2004.
Realisation of near-term synergies and preserving business momentum
By the end of 2001, Unilever reported that planned ‘disposals’ and ‘synergy savings’ from the Bestfoods integration had met expectations. Since the announcement of PtG – just one year prior – 59 plants had been either sold or closed, and the global buying programme had produced savings close to targets of €1.2bn. Some 30,000 staff were cut from the joint company.
Across the integration period, business momentum was preserved effectively – a key benchmark for successful integrations. Year-on-year revenue growth was maintained, with disproportionate operating profit BEIA growth:
Total turnover, € million
| Year | 1999 | 2000 | 2001 |
|---|---|---|---|
| Turnover (€ million) | 41,262 | 48,066 | 52,206 |
Total operating profit BEIA, € million
| Year | 1999 | 2000 | 2001 |
|---|---|---|---|
| Profit (€ million) | 4637 | 5794 | 7269 |
134% nominal growth, ~120% real growth (based on historical inflation data) across PtG period
35% nominal slump 30% real slump in EPS between 2002-2004
In line with data from the regional analysis, showing a squeeze between 2002-4, EPS grew steadily over the PtG period (expected given the acquisition), but peaked mid-period and fell.
Leverage trajectory
Unilever’s financial strategy in 2000 sets out key leverage expectations used as indicators of success:
EBITDA net interest cover greater than 8x
Net gearing <45%
From 2004 report data, these targets were achieved:
EBITDA net interest cover exceeded 8x by 2003 at 9.5x, and stood at 11.2x by 2004
Net debt reached a new low of €9.7bn by Q4, with equity of €19.5bn, creating a net gearing ratio of 33%, well within comfortable levels and pre-deal levels
Overall, the acquisition was EPS accretive, and due to strong cash generation, disposals and consolidation, and good credit risk management, Unilever deleveraged its balance sheet from the debt-financed acquisition substantially.
House View/Conclusion
The Unilever-Bestfoods acquisition itself was a success, where Unilever’s structural weaknesses were addressed, and there was clear evidence of success from achieving expected synergies. Unilever performed exceptionally well in its overarching aim to strengthen its portfolio; the company captured a greater market share and strategically divested brands from either collection to a point at which almost all turnover was derived from leading brands.
Portfolio focus and margin gains- 400 leading brands, producing 95% of turnover, and operating margin BEIA of almost 16%.
Synergy capture and savings – over €3bn in savings from restructuring and global buying programmes, and almost €1bn created from direct synergies. Savings came from procurement and supply chain consolidation, capital productivity improvements, and increased purchasing power
EPS accretion – acquisition was EPS accretive within the first full year following deal close
Key drivers of the above successes include:
Strong risk management framework – quick mitigation of regulatory risks, avoiding red tape costs and barriers to integration. Unilever’s willingness to accept trade-offs here is notable, understanding that divesting some of the world’s top brands in the short-term was required to maintain strategy and achieve long-term growth
Strong credit standing facilitating the choice to acquire with cash – Unilever’s particularly low gearing ratio pre-deal was prime for debt-financed growth. Already facing issues with share price, cash purchase prevented shareholder dilution
History of strong acquisition-led growth – both Unilever and Bestfoods had originated and built their empires from acquisitions, and leadership on both ends had expertise in successful mergers
However, considering the acquisition within the context of its purpose, which was to support Unilever in meeting its PtG (and wider) growth targets and maximise shareholder returns, wasn’t entirely successful.
Growth targets missed – sales averaged only 3.6% growth, below the 5-6% target
Geographic underperformance – North American turnover and operating profits dropped, and Latin American sales value fell similarly (despite sales volume increase), reflecting pricing issues
Slow organisational pivot – Unilever acknowledged the company’s failures in keeping up with changing markets / economic uncertainty and its consequent impact on growth. Organisational reform was undertaken, but too late.
Unfortunately, slow movement was one of the most detrimental factors to a successful acquisition, particularly in an evolving environment. Press coverage of Unilever during the 2000s often portrayed the company as slow, stodgy, with an outdated corporate culture. was a clear mismatch between senior management and the wider firm. Competition within FMCG was strong, with main competitors P&G and Nestlé successful in maximising shareholder returns and achieving sales growth, and Unilever simply did not respond appropriately, or quickly enough.
Ultimately, despite being one of few global FMCG giants, Unilever faced stagnation; with spare cash and a strong balance sheet, a fairly low-risk and low-leveraged investment opportunity was likely the only way to create true revenue growth.
In retrospect, we would uphold Unilever’s choice to acquire Bestfoods as a strong strategy for growth. Unilever maintained business trajectory well and recovered from initial financial impacts. However, it failed in leveraging Bestfoods’ synergies and assets as a tool to drive long-term growth.
Less tangible aspects of integration, particularly a focus on organisational alignment, are just as important as appropriate risk governance, cost-saving synergy. Short-term growth does not necessarily translate into an upwards trajectory, and innovation in such markets is paramount to success.