Paul Polman thought it was just going to be an informal catch-up. But it quickly became clear that Alexandre Behring, chairman of Kraft Heinz, had something very specific on his mind when he visited Unilever's art deco headquarters in London last month.
Had Mr Polman, chief executive of Unilever since 2009, ever considered a collaboration with Kraft Heinz, Mr Behring wanted to know. Mr Polman took this as a sign of interest in Unilever's spreads unit, home to brands such as Flora margarine, which his company considered "non-core".
When he pressed Mr Behring for more details, the Brazilian businessman offered to return soon with a more thorough presentation. It was clear now to Mr Polman that this was no ordinary visit. He quickly assembled a small group, led by chief financial officer Graeme Pitkethly, to try to predict what the Kraft Heinz executives might be thinking.
The team began to consider what it viewed as the worst-case scenario: a takeover bid. Even though its US rival was far smaller than Unilever — a multinational corporation with annual sales of €52.7bn and 168,000 employees — Kraft Heinz could still afford a debt-fuelled acquisition of the Anglo-Dutch company.
The proposition was one to be taken seriously, given that 50 per cent of Kraft Heinz was owned by two formidable dealmakers, Warren Buffett and 3G Capital, the secretive private equity group that has been upending consumer industries from beer to fast food.
Mr Behring, a partner at 3G, returned to Unilever's headquarters on February 10. Over sandwiches, Mr Behring laid out his audacious plan: Kraft Heinz would acquire its rival for $143bn, the second-largest takeover in history.
The cash-and-stock offer, which had the full backing of Mr Buffett and 3G's founder Jorge Paulo Lemann, would create a global consumer powerhouse. Yet the proposal, to say nothing of the $50-a-share bid, which Mr Polman thought grossly undervalued his company, was appalling to the Dutch chief executive.
"The idea of being acquired appeared to blow his mind," one person said about Mr Polman's reaction to the offer.
Another insider said: "When they put something on the table, Paul was just utterly categorical that there was no merit. He gave a number of reasons why there was no interest in such an offer." The offer was rejected immediately.
Mr Behring was surprised by Mr Polman's unequivocal response. He thought their first meeting had gone well. This misreading would be the first in a series of mistakes that resulted in the bid's collapse only nine days later.
When Kraft Heinz unexpectedly withdrew its bid on Sunday, it handed the first public defeat to a group of globetrotting investors who are not used to seeing their ambitions thwarted. The Financial Times interviewed more than a dozen people involved in the takeover battle to reveal how Unilever was able to beat back their offer.
A deal would have created the world's second-largest consumer company by sales behind Nestlé. For the maker of Kraft Mac & Cheese and Heinz Tomato Ketchup, it would have more than tripled last year's annual sales of $26.5bn and given the predominantly US-based group a deeper reach into emerging markets where Unilever dominates.
From Mr Behring's point of view, the timing was ideal. The 17 per cent slump in sterling since the UK voted to leave the EU in June meant he could buy some of the world's most recognisable brands — from Dove soap to Ben & Jerry's ice cream — in a once-in-a-lifetime sale.
For the Brazilian billionaires behind 3G, a Unilever acquisition would cap nearly 25 years of ever larger deals, including investments in beverages group Anheuser-Busch InBev and Restaurant Brands International, the owner of Burger King and Tim Hortons.
"The deal made perfect financial and strategic sense for them, but absolutely none for us," says one person close to Unilever.
Kraft Heinz had misread Mr Polman, who likes to talk about managing growth for the longer term. By investing in its brands and promoting initiatives such as environmental sustainability, Mr Polman has sacrificed short-term profits for longevity.
In contrast, 3G has rapidly transformed the consumer industry by slashing costs, cutting jobs and raising profit margins. In a sector buffeted by slower growth and changing consumer habits, investors have cheered its austere management discipline, including a strategy known as zero-based budgeting. Rivals have recoiled at what they view as a model that ultimately destroys businesses by starving them of investment.
Yet some investors have questioned whether 3G's tactics are too mercenary. Mr Buffett, who has built up a grandfatherly image as a hands-off acquirer and advocate of well-run companies, has faced criticism even from his own shareholders about 3G's more ruthless approach to dealmaking.
"I tip my hat to what the 3G people have done," he said in response to a question at Berkshire Hathaway's 2015 annual meeting. He added that there were "considerably more people in the job than needed" at companies that 3G had bought. A combined 13,000 workers have been cut since Mr Buffett and 3G purchased HJ Heinz and merged it with Kraft Foods in 2015.
Still, 3G's critics in the industry have been forced to respond to its aggressive management style — including Mr Polman, who last year outlined a three-year plan to boost profit margins and growth.
But 3G should have realised that Mr Polman would never fully embrace its philosophy. That would mean that Kraft Heinz may end up having to go hostile if it wanted to buy Unilever — a tactic Mr Buffett has vowed publicly that he would never use in his deals.
Kraft also miscalculated on another front: the changes sweeping the UK following the Brexit vote. Theresa May's conservative government has become hypersensitive to the notion that British companies can be bought for knockdown prices due to the economic repercussions of the referendum.
A deal that could have also come with ruthless job cuts would encounter further political resistance — giving Mr Polman and his team another tool in their defence.
Mr Behring left Unilever's offices with Mr Polman promising to get a full response from his company's board after their next meeting, set to be held later this month. Mr Polman immediately called and hired Nick Reid and Robert Pruzan of Centerview Partners as his financial advisers.
Unilever's team eventually grew to include Henry Stewart and Mark Rawlinson at Morgan Stanley, UBS, Deutsche Bank, law firm Linklaters and Tulchan Communications for public relations.
As the group studied the Kraft Heinz bid more closely it came to understand what the US company was attempting to pull off. The cost savings from combining with Unilever's packaged foods business alone were enough to justify a big premium for the whole company, even though the unit was only 40 per cent of its sales. By that logic, Kraft Heinz would then be getting the rest of Unilever effectively for no premium.
The group studied 3G-backed takeovers and concluded Kraft Heinz would try to seem as friendly as possible and then increase its bid in increments until there was sufficient pressure from Unilever investors. This was 3G's modus operandi. "We didn't want to get in that situation, so we needed to hit them early. Our best chance was to get them off the pitch early," said another person involved in the company's defence.
They decided that Mr Polman should press ahead with a long-planned trip to Southeast Asia to not raise suspicions.
Because Kraft Heinz's courtship was so young, secrecy became paramount to the success of its bid. But by last Wednesday, some investors and journalists had been notified about unusually high options trading in Unilever's US-listed shares.
The next day, Kraft Heinz reported lacklustre quarterly results that investors saw as a sign that the company's cost-cutting had reached a limit. Shares in the company sank 5.5 per cent.
Meanwhile, the Kraft Heinz board, which includes Mr Buffett, was holding a tense meeting. They feared that news of their bid was about to spill into the market, said two people briefed on the mood at that gathering. "The goal was to try to delay the leak as much as possible," one of the people said.
By mid-morning on Friday, they were proved correct. The FT's Alphaville blog revealed the details of the Kraft Heinz bid. Within half an hour, the US company confirmed it had "made a comprehensive proposal to Unilever about combining the two groups". It added that the offer had been rejected but suggested that the door was still open.
Unilever slammed the door shut an hour later. In an unusually terse rejection, it said the Kraft Heinz offer "fundamentally undervalues" the company and that the proposal had "no merit, either financial or strategic".
Kraft Heinz had expected its first offer to be rejected but was caught off guard by the harsh language Unilever used. "Everyone thought there was a relationship of mutual respect but clearly they went out strong on the culture stuff . . . making Kraft Heinz look like the bad guy and Unilever as the angel," a person close to the US company said.
Kraft Heinz's advisers at Lazard and law firm Paul Weiss, its top management and 3G executives regrouped later on Friday to find a new way forward. Additional advisers including PR companies Finsbury and Joele Frank were brought on. Shares in both companies soared to close the week. The US group was willing to pay substantially more.
However, more fissures appeared. UK politicians started voicing their concerns about another large British-based company being scooped up on the cheap by a foreign rival. Unilever could have ended up becoming the third major UK company to be acquired since the Brexit vote after chip designer ARM Holdings and pay-TV broadcaster Sky.
Under strain ahead of negotiations with the EU, the May government has further pigeonholed itself with its tough talk on a strong industrial policy that protected British companies and jobs. Shuttling between London and Paris to deal with the fallout of a proposed Peugeot-Vauxhall deal that could see thousands of jobs shed, Greg Clark, UK business secretary, spoke with Mr Behring and Sue Garrard, head of communications at Unilever.
Downing Street instructed officials to look at Unilever's business in the UK and whether a Kraft Heinz bid would raise any policy issues, including over the future of the company's British headquarters, its UK listing, jobs, and research and development.
Back in London on Saturday, as Mr Polman tapped into his network of contacts, he was informed that Finsbury was working with Kraft Heinz on PR. Within seconds, Mr Polman blasted off an email to Sir Martin Sorrell, the founder and chief executive of WPP, the advertising company that counts Unilever as one of its most important clients.
Finsbury, which is majority owned by WPP, was removed from the Kraft Heinz side by the end of the day.
On Sunday morning in London, people close to Kraft Heinz said the US company was determined to make a series of concessions, including taking on Unilever's name after the merger as well as offering guarantees to maintain R&D investments and headquarters in the Netherlands, UK and the US.
But Mr Behring, Mr Lemann and Mr Buffett received a letter from Mr Polman outlining his hostility to a deal. They decided then it would be better to retreat sooner rather than later. "It was a surgical decision," said a person close to the trio. "There is little space for emotions in these circumstances."
At 5:31pm a joint statement by Unilever and Kraft Heinz put to rest any hopes of a deal. It said: Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever.
Although it would be foolish to rule out a 3G-inspired comeback of Kraft Heinz for Unilever, the Brazilian management cannot return for at least six months under UK takeover rules.
The ultimate decision to pull the plug on the effort was made by the two key billionaires backing the transaction — Messrs Buffett and Lemann, who wanted to avoid a potentially dirty and public takeover battle.
One person close to Unilever said: "From the lunch, Kraft Heinz should have got the impression that they had got it all wrong."
Another says 3G and its portfolio companies have a clever way of doing business: "Extreme aggression with a smile, so we gave them extreme rejection with a smile."
Undeterred by defeat, 3G's Mr Lemann and his lieutenants are already planning their next move. A $15bn war chest is at their disposal, ready to hunt the next consumer goods monster.
—Additional reporting by Jim Pickard
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