General Mills shares fall on reduced outlook, bid by Kraft Heinz for Unilever

Star Tribune |

--General Mills shares fell 3 percent at opening bell Friday after the company announced lower sales estimates for the year and on news that rival Kraft Heinz made a bid for Unilever.

The Golden Valley-based maker of Cheerios and Betty Crocker cake mixes said Friday it expects net sales to drop 4 percent fiscal year 2017, which ends in May. This is at the lower end of its previous guidance of sales dropping between 3 and 4 percent. The disappointing sales numbers are primarily due to soup and yogurt. General Mills said it expects to deliver an adjusted operating profit margin of upward of 18 percent for the fiscal year, an increase of more than 120 basis points over last fiscal year.

General Mills stock has fallen significantly in the last two days following two big news events for its industry peer Kraft Heinz. Wall Street has been anticipating that Kraft Heinz, run by Brazilian-based 3G Capital, would soon make another takeover bid. Oreo-maker Mondelez International and General Mills were rumored to be the favorites.

But Chicago- and Pittsburgh-based Kraft Heinz, maker of Velveeta cheese and salad dressings, reported lackluster quarterly results after market closed Wednesday. Its management team downplayed any interest in merger and acquisition talks with investors on a call Wednesday night, sending downward all of the major food companies' stocks early Thursday morning.



The market awoke Friday morning to another surprise: Kraft Heinz had made a bid for Unilever, which the London-based maker of Hellmann's, Lipton Iced Tea and Ben & Jerry's ice cream quickly rejected. The $143 billion bid marks the largest takeover attempt yet in the food industry. Unilever said the $50 per share offer "fundamentally undervalues" the company, Bloomberg reports.

But analysts say this is likely just Kraft Heinz's initial offer and further negotiations are possible, and even likely.

"Although Unilever doesn't appear to be interested, we don't believe Kraft Heinz is willing to close the book on this deal but would likely need to offer a higher price and potentially boost the cash component to bring Unilever to the table," packaged foods analyst Erin Lash of Morningstar wrote in a note Friday.

She forecasts Kraft Heinz would need to offer between $165 billion and $175 billion for Unilever to agree.

This gives General Mills, Mondelez and other U.S. food companies a reprieve, even if temporary, from the mounting pressure. 3G, which runs Kraft Heinz, is known for its stringent accounting practices and deep cost-cutting tactics. This allows it to achieve higher than typical industry profit margins while its sales continue to drop. General Mills has enacted its own version of zero-based budgeting, which requires every department to justify every dollar spent at the start of the year, and has closed plants and cut 5,000 jobs over the last five years.

General Mills buys some time to regain market momentum if Unilever and Kraft Heinz reach a deal. 3G has made it clear that it plans to further consolidate the food industry, much like it did the global beer industry.

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