After Unilever's takeover of US food giant Bestfoods, Tom O'Sullivan meets the in-house lawyers who negotiated one of history's biggest UK/US deals in less than four days
No sooner had Unilever announced that it was killing off 1,200 of its 1,600 brands than it went out and spent £13.3bn on a whole new set of household names.
This apparent U-turn is explained by the fact that by acquiring Bestfoods, Unilever is buying some of the best known brands in the world, including Marmite, Hellmann's mayonnaise, Knorr soups and Pot Noodle. The deal – the largest takeover of a food company in over a decade – also reinforces Unilever's strategy of concentrating on its core product areas and gives it a stronger foothold in the US market.
Bestfoods had been on the Unilever drawing board for several years. Unilever investigated buying the US food company before but for one reason or another never went through with it. On the other side of the Atlantic, Bestfoods had also done its homework and identified Unilever to be among several companies it was considering doing a deal with in the consolidating food market, but it too had done nothing about making an approach.
That all changed last February when Unilever's general counsel Stephen Williams was contacted by the firm's food business group saying that a serious bid for Bestfoods was being mounted. He was asked to look at the "ifs and buts" of any possible deal. Within four months, Williams was in New York with his opposite number, Bestfoods' vice-president and general counsel Eduardo Sanchez, putting the finishing touches to a merger document which sealed the £13.3bn deal.
In reality the deal was done even quicker – in a matter of days at the start of June. Until the end of April, Bestfoods knew nothing of Unilever's plans and then throughout May – having rejected its original offer – continued to talk with other "potential strategic partners" believed to have included a $16bn (£10.56bn) deal to take control of the Campbell Soup company. Heinz and Diageo were also linked with possible deals.
Sanchez says: "Bestfoods had been exploring several strategic options with other major companies. Each of those negotiations raised a number of issues ranging from the strictly legal to social issues and management responsibilities. At the time we were trying to make the best strategic fit for Bestfoods, the Unilever proposal came over the top and accelerated past all other contacts and discussions that were running along parallel tracks.
"When you are dealing with strategic alternatives that will transform the company, one of the most fundamental issues is confidentiality – there are stock market concerns, the danger that material information is leaked and also that internal confusion that may be needlessly created."
Until Unilever tabled its "proposal to talk" at the end of April, Sanchez and his in-house team had handled all other negotiations internally. But he then hired New York law firms Fried Frank Harris Shriver & Jacobson on corporate work and Wilmer Cutler & Pickering on anti-trust issues.
Sanchez's much cherished confidentiality was blown apart on 3 May, the day after the Bestfoods board had met in secret to reject Unilever's original offer as "financially inadequate". The Financial Times ran a story that the two were talking. Sources close to the deal say the leaking of the news then "dictated the pattern of the deal". One of Bestfoods' potential partners decided at this stage to end its talks with the company. "I think some of the companies thought that they may do a deal with us – which would have required them exposing information about themselves – and Unilever could still have come over the top and done the deal," says Sanchez.
The two sides did not talk for a further month after Bestfoods' original rejection, until Unilever increased its offer by £1.1bn to £13.3bn. The Bestfoods lawyers received the final Unilever offer on Friday 2 June. It was negotiated over that weekend with much of the drafting and re-drafting done via phone and fax from hotel rooms. The due diligence review was handled at the offices of Fried Frank and Unilever's US law firm Cravath Swaine & Moore hosted some discussions.
The agreed offer was presented to the Bestfoods board on 5 June. Its meeting continued on 6 June and the deal was announced that morning. One of the biggest deals in US/UK corporate history had been negotiated in less than four days.
Back in February, Unilever's initial in-house team on the Bestfoods deal was made up of just five people. It was led by Williams plus Ron Soiefer in the US and their colleague Job Moolenburgh in Rotterdam. Personnel and employment specialists were also brought in to advise. Williams briefed senior partners at the company's existing external law firms, Slaughter and May in London, De Brauw Blackstone Westbroek in The Netherlands and US firm Cravath Swaine & Moore which had just advised on Unilever's £1.5bn takeover of SlimFast.
"We could not handle a transaction of this size alone," says Williams. "The role of the law firms was not as significant at that stage – when we were looking for information and guidance – as it became. But as it gets closer to a deal the lawyer's role becomes pivotal. I wish there was a blueprint for M&A work but we look at this every time and there isn't.
"We have to make the board aware of everything that an acquirer should be aware of – some of that is legal but some of it is general corporate governance. We contribute on a broad field not just what the final agreement will look like or the relevant New York Stock Exchange rules. Transactions live or die by their relevance to the corporate strategy – it makes us lawyers very aware of pushing the strategy forward. And a large transaction is a flag to show what the strategy is. In one sense the real heavy duty legal work only began in the first week of June and will continue into the Autumn because we have yet to close the deal."
Among the non-legal areas that Williams' team advised on were the impact on the financial profile of Unilever and on the company's structure and its brand development and portfolio. It is also involved in compiling profiles of any target companies such as Ben & Jerrys ??? ice cream, which it bought for £205m in February.
Across all of its territories and disciplines, from M&A to trademark and patent work, Unilever employs 230 lawyers. Williams admits that he likes to blood younger members of the in-house M&A team on big deals to give them relevant experience. Experience that Unilever will need as it embarks on a series of sales. The European bakery supplies business was sold last week for £450m to pay for its acquisitions, and as it sheds some of those brands it no longer has a home for.
Unilever's strategy in the Bestfoods merger had always been to approach the board with an agreed joint Bestfoods/Unilever offer. It did not want the takeover to become hostile. Legal defences put in place by Bestfoods following a failed takeover bid in 1987 meant that a hostile bid would be a long affair with no guarantee of success.
The defences include a rotating board of 12 members. A maximum of four board members can be changed each year, which means that it would take a hostile bidder at least two years to gain control of the board and the company.
For Sanchez that has been one of the most important lessons of the deal. "This deal confirmed some classic issues – the importance of having legal defences in place. Without them the bidder can come straight at you and put the pressure on. Secondly, the importance of giving the board thorough analysis of all the alternative options and valuations, and thirdly the overwhelming power of cash – in most mergers of equals there is a trading of shares but we were faced with a solid deal in hard cash."
It turned out to be an offer too good to refuse. The resulting merger may sound like a filling in one of Elvis Presley's more infamous combination sandwiches – Hellmann's, Skippy peanut butter, Marmite and Chicken Tonight – but the coming together of Bestfoods and Unilever also represents one of the cleanest mergers in recent corporate history. All they have to do now is integrate the two companies, eradicating some of those brand duplications (Bovril and Oxo are now owned by the same company). There is also the small issue of overcoming any competition barriers that may still be put in the way of the deal.
The real legal work has only just begun.