Unilever and Bestfoods have for many years been market leadersin the consumer foods industry. Both manufacture and markethousehold name brands, including Ben & Jerry's and Lipton(Unilever) and Hellmann's and Knorr (Bestfoods). Unilever alsohas major businesses in the household care and personal productssector.

A year ago Unilever determined to focus on core brands, astrategy known as the "Path to Growth". A merger with Bestfoods,with its well known brands, complementary geographical coverageand strong foodservice (catering) operations, would accelerateUnilever along that path. Bestfoods had been looking to forge abusiness combination within the food industry intermittentlysince 1992.

It was against this background that Unilever approachedBestfoods in April of this year to propose a merger of the twogroups. That initial telephone call to Bestfoods' chairman,Charles Shoemate, set in motion a process that was to lead to atransforming merger.

Like many suitors, Unilever's first approach was not asuccess. In early May Bestfoods' board of directors voted toreject the initial non-public proposal of US$66 per share asbeing financially inadequate and not in the best interests of thecompany and its stockholders. Both companies issued pressreleases. Unilever said it was "disappointed with Bestfoods'response and their unwillingness to discuss with Unilever anyaspect of its proposal."

But there were advantages of the news being in the publicdomain. As Stephen Williams, General Counsel of Unilever, says "It was like an eight week courtship. We could discuss theproposed merger with major shareholders and test the marketwithout having to make a formal offer. Both parties were able tocommunicate through the press which was an important tool."

Bestfoods was keeping its options open. For the rest of Mayits board approached a number of other consumer food companieswith proposals for possible business combinations, including somecompanies with which it had previously held discussions. AsWilliams says, "They were conducting a textbook defence -examining all the options to get the best deal for theirshareholders."

On 30th May, Unilever increased the offer. This triggeredfinal negotiations which took place over an intense four days.Bestfoods was simultaneously in discussions with two majorconsumer food companies. Unilever carried out due diligence(see "Due diligence" below) and the parties agreed afinal price of US$73 in cash for each share of Bestfoods commonstock, valuing Bestfoods' equity at US$21.3 billion. Unileveralso agreed to assume Bestfoods' net debt of US$3.1 billion. On6th June, the parties entered into a merger agreement (see"Merger agreement" below) and the deal closed on 4thOctober.

Bestfoods was a publicly quoted US company and a number ofpossible merger structures were therefore open to theparties:

A one-step merger must be approved by the board of the targetand the target stockholders. It can take much longer than atwo-step merger because it involves the preparation of a proxystatement (circular to shareholders), which must be submitted tothe US Securities and Exchange Commission for review. Thisgenerally takes a minimum of eight weeks and is followed by anotice period of 20 business days before the special meeting ofstockholders takes place. However, as Peter Wilson, of Cravath,Swaine & Moore, says "The single-step merger is commonly usedin recommended mergers like this where the regulatory approvalprocess is likely to vitiate the timing advantage of a two-steptransaction, in other words where there is a tender offerfollowed by a 'squeeze out' merger."

The key steps in the merger were:

The merger was approved by Bestfoods common and preferredstockholders, voting together as a single class, on 2nd October.When the merger became effective (that is, on the date of filingof a certificate of merger with the Delaware Secretary ofState):

Immediately before the merger became effective, each share ofBestfoods preferred stock was automatically converted into anappropriate number of shares of Bestfoods common stock inaccordance with its terms.

Dissenting stockholders had two main options. They could:

Approximately 66.7% of Bestfoods' stockholders voted in favourof the merger, and approximately 1.6% voted against. Theremaining stockholders, approximately 32%, who did not exercisetheir votes, received the merger consideration in exchange fortheir shares of common stock.

Unilever offered cash to Bestfoods shareholders for a numberof reasons. As Stephen Williams explains "Our dual headedstructure makes issuing equity quite complex and in the currentmarket the ability to offer cash gives you a competitiveadvantage."

Unilever initially financed the transaction by agreeing arevolving credit facility with four banks on 6th June. Itsubsequently issued short term commercial paper under twoexisting programmes. Finally, on 20th October (shortly afterclosing) the group raised further funds by a bond issue, with theintention of cancelling the revolving credit facility in anamount equal to the proceeds of the issue.

Immediately following the transaction, Unilever's gearingstood at approximately 70%.

The merger agreement was executed on 6th June between UnileverPLC, Unilever N.V., Unilever United States, Inc., the Delawaresubsidiary and Bestfoods. It was amended on 7th July and amendedand restated on 22nd August. Its main purpose was to effect themerger of the Delaware subsidiary with and into Bestfoods inaccordance with the DGCL.

The agreement was conditional upon the following (see"Unilever shareholder approval" and "Competition approval"below):

The agreement contained representations and warranties byBestfoods and the Unilever companies (Unilever PLC, UnileverN.V., Unilever United States, Inc. and the Delaware subsidiary).Bestfoods' representations and warranties included: ownership ofsubsidiaries, capital structure, authority to execute theagreement, litigation, compliance with laws and confirmation ofno material adverse change or other material adverse event. TheUnilever companies' included: authority to execute the agreement,operations of the Delaware subsidiary and confirmation ofsufficient resources to pay the merger consideration. Disclosureswere made against the representations and warranties.

Both parties had a right to terminate the agreement in certaincircumstances before closing. These included:

Unilever and Bestfoods also agreed break fees. Bestfoodsagreed to pay US$625 million to Unilever if:

Unilever agreed to pay a fee of US$100 million to Bestfoods ifBestfoods or Unilever terminated the merger agreement because theUnilever shareholders failed to approve the merger.

Break fees have traditionally been higher in the US than inEurope. US directors are, however, bound by a fiduciary duty toact in the best interests of shareholders. As Ed Sanchez,Bestfoods' General Counsel, explains "The size of the fee agreedby Bestfoods was within the range of established practices."

The difference in size of fees also reflects the differentactions and incentives of the parties. Bestfoods would bepenalised for actions which were within its control. Unileverwould have to pay a fee only on termination due to itsshareholders having failed to approve the transaction.

Ed Sanchez also comments "In agreeing to [this size of fee]Bestfoods was not ruling out the possibility of another buyercoming along. However, news of the merger with Unilever had beenpublic for a while and so Bestfoods was confident that the newshad flushed out all potential purchasers. However, if anotherpurchaser came along, at this late stage, it would need to make acompelling offer."

Bestfoods allowed Unilever to carry out a financial and legaldue diligence exercise before the merger agreement was signed.There was no legal requirement to permit due diligence, butBestfoods recognised that it would provide comfort to Unileverand that it offered a final opportunity for the parties tonegotiate a price. Bestfoods' data room at the offices of itslawyers, Fried, Frank, Harris, Shriver & Jacobson, wasavailable to Unilever and the two remaining competitors over theweekend of 3rd and 4th June. Bestfoods compiled key informationwhich included material contracts, joint venture agreements,contracts with change of control clauses and major litigation.Bestfoods also provided information specifically requested byUnilever and was available to discuss matters on the telephonewith Unilever and its representatives.

If the due diligence had produced any nasty surprises forUnilever, it could have renegotiated the price or walked awayfrom the merger. This was particularly important because Unileverwould not, realistically, have been able to make any claims forbreach of warranty by Bestfoods after the merger had closed, asBestfoods would by then be its subsidiary.

The merger was conditional upon the consent of theshareholders of Unilever PLC and Unilever N.V. as well as thestockholders of Bestfoods.

The consent of Unilever PLC shareholders was required underChapter 10 of the UK listing rules. These broadly requireshareholder approval (by simple majority) for major transactionswhere one or more of a number of ratios (such as consideration tomarket capitalisation of the listed company) is 25% or more.

The consent of Unilever N.V. shareholders was not requiredunder Dutch law or the rules of the Amsterdam Stock Exchange. Butthe boards of Unilever N.V. and Unilever PLC decided that givenUnilever's particular holding company structure, it wasappropriate to seek the approval of Unilever N.V. shareholders aswell.

The merger was notified to anti-trust regulators in the EU, USand at least six other countries.

European Commission. As the mergerwas caught by the EC Merger Regulation, it had to be notified tothe European Commission (the Merger Task Force (MTF) in DG Comp)and could not take effect until the Commission had given itsapproval.

Three minutes after Unilever and Bestfoods' chairmen hadagreed the merger on 6th June, the Unilever chairmen called theCompetition Commissioner, Mario Monti to inform him about it.This set the tone for all subsequent dealings with theCommission. As Stephen Williams says, "When dealing with the MTFyou need to be realistic and utterly honest and you should nevertry to stage manage negotiations. You have to appreciate that theofficials are overworked and that you need to help them byproviding clear information as early on in the process aspossible."

In collating information about market share, Unileverbenefited from the fact that the merger was agreed and that itcould therefore obtain information from Bestfoods. Unilever couldalso take advantage of the mass of published data by, forexample, Nielsen and Food for Thought about consumer products.However, there was less publicly available data for thefoodservice industry and the fact that both groups manufacturesuch a wide variety of products meant that information gatheringwas a time-consuming task.

Unilever managed the process by collecting as much material asit could before formally notifying the MTF about the merger. SaysWilliams "Once you notify, the clock starts ticking so you needto do as much work as possible before then."

Broadly, the first phase investigation (starting with formalnotification on Form CO) lasts for one month. At the end of Phase1 the Commission may declare that there are serious doubts as tothe compatibility of the concentration and that a second phaseinvestigation is required. As a Phase 2 investigation may lastfor up to four months, and therefore have an adverse impact onthe commercial rationale for a transaction, parties try to avoidreaching that stage.

In many respects the deal was a classic Phase 2 merger becauseof its size and the number of product markets involved. But thiswas avoided mainly because Unilever was willing to make realisticdisposals. These included Unilever's Oxo brand in Europe, itsBatchelors brand in the UK, its Blå Band brand in Sweden,Finland and Denmark and Bestfoods' Lesieur range of mayonnaiseproducts in France.

As Williams explains, "We realised that we had to cut off anarm for the sake of the body as a whole". He adds "You need tohave worked out the economics of the transaction at the outset,so that you know whether the merger still makes financial senseonce the remedies are agreed." He acknowledges that the Path toGrowth strategy helped Unilever make objective decisions aboutdisposals.

US Federal Trade Commission. Themerger was also caught by the Hart-Scott-Rodino Act, andtherefore needed to be notified to the US Federal TradeCommission (FTC) and the US Department of Justice. One of theseagencies then reviews the filing; in this case, it was theFTC.

Like the ECMR process, the review by the FTC can fall into twophases, the first lasting 30 days and the second being muchlonger and more complicated. As in Europe, it was difficult toobtain sufficient data about the impact of the merger on thefoodservice industry, which is more decentralised than theconsumer products industry, and in which there are many moresmaller players. Because of the difficulty in obtaining thisdata, the FTC and Bestfoods realised that the initial reviewwould not be able to be completed within 30 days. As there didnot appear to be many overlaps between Unilever's and Bestfoods'US businesses, and the problem was essentially one of allowingofficials time to review the documentation, it was agreed thatUnilever and Bestfoods could withdraw and refile. The first phasebegan again. Bestfoods and Unilever were aware that the FTCexchanged data with the MTF, as is customary. The waiting periodexpired on 9th September and the merger was effectively cleared.Bestfoods and Unilever did not have to undertake to make anydisposals.

Other countries. The merger alsoneeded approvals from the competition authorities in about sixother jurisdictions before closing. Potential penalties rangedfrom fines to the imprisonment of local management. Unilever'sstrong local presence and familiarity with the local authoritiesassisted it in obtaining these approvals in good time.