According to the article, "Unilever and McCormick investors find US$65 billion food deal hard to swallow", Unilever and McCormick shareholders have found the reality of their planned $65 billion ​food deal hard to digest, perturbed by the transaction's structure, its long timeline to closing and the potential for antitrust scrutiny.

Shares in ‌Unilever, owner of Hellmann's mayonnaise to Knorr stock cubes, fell by seven percent after the deal was announced, wiping $7 billion from its market value while McCormick, owner of Cholula hot sauce, also took a hit as its shares slid by about five percent.

"The market, so far, has not reacted well to the news," said Chris Beckett, consumer staples analyst at Quilter Cheviot, a Unilever investor. He pointed to regulatory ​uncertainty and the challenge of integrating a sprawling new food business.

The Deal

The deal, which is also not expected to be completed until mid-2027, will be structured as a ​so-called Reverse Morris Trust (RMT), which offers tax benefits. Unilever will spin off its food division and then merge this with McCormick.

Unilever and ⁠its shareholders will end up with a 65 percent stake in the fully diluted combined company's outstanding equity.

"Unilever shareholders will still own a large chunk of the newly combined food ​company," Beckett said. "That large ownership block will be an overhang for a time to come."

Analysts at RBC Capital Markets, meanwhile, said the proposed structure was "hardly a clean exit" given ​that Unilever shareholders would still own 55.1 percent of the combined business. Unilever itself would hold onto a further 9.9 percent stake.

"We aren't overly impressed by what we can see," they said.

“We Take a Long-Term View”

Investors have for years pushed Unilever to sell its food business, with the sector under pressure as health-conscious shoppers move away from packaged food to fresh groceries.

The rise of GLP-1 weight-loss drugs has further ​eroded demand and investors' faith in packaged food, especially with stiff competition from cheaper private label brands.

McCormick CEO Brendan Foley was bullish when asked about the stock market reception ​to the deal.

"I'm not looking at the share price on a daily basis, we take a long-term view," he told journalists on a call.

The consumer sector has already been suffering from Iran ⁠war as freight and energy costs have risen, which also pushes up inflation for consumers and dampens demand.

Foley told analysts that McCormick remained confident in the deal's long-term fundamentals, despite geopolitical tensions and near-term pressure on consumer goods companies.

Some long-term Unilever investors were more supportive.

Aviva Investors' Harsharan Mann said the deal aligned with Unilever's aim to become more focused on beauty, while W1M portfolio manager Tineke Frikkee said the strategic direction was logical, but cautioned it could reduce economies of scale.

BNP Paribas Equity Research senior analyst Max Gumport said ​the drop in McCormick's share price was ​primarily down to investor concerns and the ⁠negative market response to the unusually large number of deals announced of late.

"While McCormick has a strong track record as an acquiror, large-scale M&A has rarely worked in the broader consumer packaged goods space," Gumport said.

Antitrust Scrutiny?

Under U.S. law, the Federal Trade Commission (FTC) has ​30 days from when a merger is reported to the agency to determine whether to issue a second request for ​information, which can expand deal ⁠timeframes while companies comply.

Last year, several food transactions closed without FTC challenges, including candy-bar giant Mars' acquisition of Cheez-It maker Kellanova, and cereal manufacturer WK Kellogg's acquisition by the owner of Ferrero Rocher.

Bill Kovacic, a former FTC chair, said the Unilever and McCormick deal would likely receive a close look by the FTC, because the agency is focused on mergers in industries ⁠that affect ​prices for U.S. consumers.

"Firms today know that if you fall within the defined set of industries of ​interest you are going to be examined more carefully than perhaps the others would be," he said.

"They ought to be able to come to a fairly quick decision about whether they need to look further," he ​added of the deal.

Discussion Questions

  1. What is a merger? How is a merger different from an acquisition?

    A merger is when two separate companies combine to become one single company. Instead of one company buying and controlling the other (which is typically called an acquisition), a merger is often presented as a joining of equals, although in practice one side may still be more dominant.

  2. Describe the role of the Federal Trade Commission (FTC) in addressing this merger.

    The FTC reviews proposed mergers to make sure they do not substantially reduce competition or create a monopoly in violation of U.S. antitrust laws. The FTC evaluates mergers under Section 7 of the Clayton Act, which prohibits mergers that may “substantially lessen competition” or “tend to create a monopoly.” The FTC examines whether the merger would raise prices for consumers; reduce product quality or innovation; limit consumer choice; or harm competition in a specific market. It analyzes market share, competitors, barriers to entry, and potential effects on consumers.

    Under the Hart-Scott-Rodino Act, large mergers must be reported in advance. The FTC may issue a “second request” for detailed documents and data (as referenced in the article). It may also interview executives, customers, and competitors. After review, the FTC can approve the merger if it has no serious competitive concerns; approve the merger with conditions (e.g., by requiring the divestiture of certain assets); or challenge the merger in court to block it.

  3. In your reasoned opinion, should federal regulators approve this merger? Why or why not?

    This is an opinion question, so student responses may vary. In your author’s opinion, the article does not include sufficient information regarding the salient issues from which to formulate a reasoned opinion (e.g., whether the merger would raise prices for consumers; reduce product quality or innovation; limit consumer choice; or harm competition in a specific market). This underscores the importance of the pre-merger FTC investigation.