3G Capital's austere empire-building weighs on Kraft's Unilever bid

Fri Feb 17, 2017 9:30pm EST
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By Michael Flaherty and Lauren Hirsch

(Reuters) - Buyout firm 3G Capital managed to build a consumer empire with a market value of over $140 billion in just seven years. Yet its ruthless approach to costs may end up hampering 3G-backed Kraft Heinz Co's KHC.O $143 billion bid for Unilever Plc ULVR.L.

3G made its name in corporate America by orchestrating large debt-laden acquisitions and then slashing costs dramatically to juice profits. Using a strategy called zero-based budgeting, its managers must justify all expenses, from pencils to forklifts.

Its investment approach has attracted backers ranging from billionaire investor Warren Buffett, who has helped bankroll all four major 3G deals, to celebrities such as supermodel Gisele Bundchen and tennis champion Roger Federer, who invested in 3G's latest approximately $10 billion fund.

This relentless focus on costs, however, may end up making Kraft's pursuit of Unilever more difficult. In rebuffing Kraft's bid publicly on Friday, Unilever cited "strategic" in addition to financial reasons. While sources told Reuters that Kraft believes that investing in innovation would be an important part of the combined company, analysts have begun to question whether 3G's operational approach hinders Kraft's ability to grow over the long term.

"We can understand how some investors could wonder if Kraft's efficiency-centric model is as sustainable as many have believed," Barclays analysts said earlier this month.

Kraft's sales were down 3.8 percent to $6.86 billion in the fourth quarter of 2016. Kraft has attributed the decline in sales to a pruning of its portfolio, as it weeds out non-profitable products. It sees tight operational management as perfectly compatible with sales growth.

Unilever, the London and Rotterdam-based owner of Dove soap and Hellmann's mayonnaise brands, defines itself as a business "making sustainable living commonplace." This means putting money with an eye beyond the immediate bottom line, such as products with low environmental impact and resources toward bringing safe water to under-served regions.

"(The rebuff of Kraft) makes us also wonder if Unilever's focus on sustainability might make it very resistant to any further approach from Kraft," said Royal Bank of Canada analyst David Palmer.   Continued...

Bottles of salad dressing, made by food conglomerate Kraft Heinz, are seen on a supermarket shelf in Seattle, Washington, U.S., February 10, 2017.  REUTERS/Chris Helgren