3G made its name in corporate America by orchestrating large debt-laden acquisitions and then slashing costs dramatically to juice profits. Using a strategy called zero-based budgeting, its managers must justify all expenses, from pencils to forklifts.

Its investment approach has attracted backers ranging from billionaire investor Warren Buffett, who has helped bankroll all four major 3G deals, to celebrities such as supermodel Gisele Bundchen and tennis champion Roger Federer, who invested in 3G’s latest approximately $10 billion fund (all figures US$).

This relentless focus on costs, however, may end up making Kraft’s pursuit of Unilever more difficult. In rebuffing Kraft’s bid publicly on Friday, Unilever cited “strategic” in addition to financial reasons.

While sources told Reuters that Kraft believes that investing in innovation would be an important part of the combined company, analysts have begun to question whether 3G’s operational approach hinders Kraft’s ability to grow over the long term.

“We can understand how some investors could wonder if Kraft’s efficiency-centric model is as sustainable as many have believed,” Barclays analysts said earlier this month.

Kraft’s sales were down 3.8 per cent to $6.86 billion in the fourth quarter of 2016. Kraft has attributed the decline in sales to a pruning of its portfolio, as it weeds out non-profitable products. It sees tight operational management as perfectly compatible with sales growth.

London- and Rotterdam-based Unilever — whose food brands in Canada include Becel margarine, Ben and Jerry’s ice cream, Knorr soups, Lipton tea and Hellmann’s mayonnaise — defines itself as a business “making sustainable living commonplace.”

This means putting money with an eye beyond the immediate bottom line, such as products with low environmental impact and resources toward bringing safe water to under-served regions.

“(The rebuff of Kraft) makes us also wonder if Unilever’s focus on sustainability might make it very resistant to any further approach from Kraft,” said Royal Bank of Canada analyst David Palmer.

Adding to Kraft’s challenges, the U.S. consumer food company will need to either integrate or find other options for Unilever’s household and personal care (HPC) business, which makes products such as toothpaste, soaps and detergents.

“It seems plausible that the HPC piece of (Unilever) then becomes a merger partner for something 3G might do on its own in HP. In other words, this could be part one of a huge two-step process,” said Don Bilson, head of research at event-driven research firm Gordon Haskett.

Kraft, Unilever and 3G Capital declined to comment.

Management philosophy brewed at Anheuser Busch

Co-founded by Brazilian billionaire financier Jorge Paulo Lemann, 3G combined Kraft and H.J. Heinz Co in 2015 to create a company that now has a $112 billion market capitalization, and combined Burger King and Tim Hortons in 2014 in a $11 billion deal.

The 3G management philosophy was developed by Lemann and Brazilian investment bankers Marcel Herrmann Telles and Carlos Alberto Sicupira, and pioneered at Budweiser brewer Anheuser Busch InBev, the world’s biggest brewer, which they helped create through a series of big mergers.

Lemann, Telles and Alberto Sicupira made their mark at Banco Garantia, the investment bank they founded in Brazil in the 1970s. After selling it to Credit Suisse Group AG in 1998, they formed private equity firm 3G to invest in U.S. consumer names.

After 3G teamed up with billionaire Buffett to buy Heinz in 2013, they closed six factories and cut 7,000 jobs in 18 months. Operating margins jumped from 18 per cent to 26 per cent.

Lemann, Brazil’s richest man and a former tennis pro, once served on the board of Gillette, where he met Buffett, who has partnered with Lemann on Heinz and Kraft and has said he would like to do more deals.

While 3G is often seen as extreme — at Heinz they limited employee use of company printers to 200 pages per month, requiring double-sided printing — zero-based budgeting has been adopted elsewhere, such as at Oreo cookie maker Mondelez International.

— Reporting for Reuters by Michael Flaherty and Lauren Hirsch in New York.

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Investors rushed to bid up shares of CSX after news reports that former Pershing Square partner Paul Hilal was teaming up with Canadian Pacific Railway’s outgoing CEO Hunter Harrison to shake up the Jacksonville, Fla.-based firm.

The stock’s jump added more than US$6 billion to CSX Corp’s market value. Harrison, a well-known turnaround expert, has overseen a three-fold increase in CP’s stock price in five years at the helm. He has also tried to engineer consolidation in the North American rail industry in the past.

A person familiar with the matter said Hilal is aiming for a turnaround of the company rather than its sale. Hilal declined to comment.

While Harrison’s pursuit of a deal could now get another chance, regulatory and political obstacles remain.

Many large rail customers spoke out against CP’s bid last year for No. 4 U.S. railroad Norfolk Southern. The bid failed last spring in the face of criticism from lawmakers and customers, including package delivery giants FedEx and UPS.

“Still, we know Harrison wants to see that sort of deal. And we know CP wanted it as well. Perhaps what we are now seeing is a backdoor way for that deal to happen,” Gordon Haskett head of research Don Bilson, said in Thursday’s note.

Harrison has previously said that CSX has several strengths as a merger target, but stressed that he never made a formal offer for the U.S. railroad.

Keith Creel, who takes over as chief executive of CP on Jan. 31, told analysts on Wednesday that he expects future industry consolidation.

“I don’t know if it’s going to be two years, three years, five years,” he said. “But it’s inevitable. Volume growth is going to come. Railways are not going to be built (so) consolidation will occur. And I can certainly see that happening within my career.”

Hilal’s fund, Mantle Ridge LP, has raised more than US$1 billion and is in the final stages of working out an agreement with Harrison on their partnership.

CSX spokesman Gary Sease said the company and the board will evaluate Mantle Ridge’s views and looks forward “to discussing our core strategy.” The deadline for CSX shareholders to nominate directors is Feb 10.

Opposition to a CSX merger is already reemerging.

The CEO at Union Pacific said the No. 1 U.S. railroad remains opposed to mergers between major railroads in the U.S.; Lance Fritz told Reuters “we still think Class 1 mergers in the United States are not a good idea.”

Union Pacific had publicly opposed CP’s bid for Norfolk Southern.

Harrison has repeatedly touted U.S. rail industry consolidation as a way to improve efficiency and profitability. That view may find stronger support in the administration of U.S. President Donald Trump.

But there are also red flags for companies like Union Pacific. Trump has criticized the auto industry for building cars in Mexico for import into the U.S. and has threatened to impose a “border tax” or roll back the North American Free Trade Agreement (NAFTA).

Fritz said about 12 per cent of Union Pacific’s business is linked to Mexico, but added he is an “optimist” about the prospects for NAFTA even though Trump campaigned as a fierce critic of the North American Free Trade Agreement.

“While I think NAFTA is ripe for modernization in labor practice, environmental practice and e-commerce, it also represents a boon to the U.S. economy,” he said. “It benefits the U.S. consumer and creates U.S. jobs.”

— Michael Flaherty reports on corporate governance and activist shareholders for Reuters from New York. Additional reporting for Reuters by Nick Carey in Detroit and Allison Lampert in Montreal.

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The two companies plan to form a joint venture, in which Cofco will own 51 per cent, to link its grain processing and distribution business in China with Noble Agri’s grain sourcing and trading arms, the firms said Wednesday.

The move will help China develop a powerful agricultural trading house along the lines of its Unipec oil trading business – one of the world’s biggest buyers of crude oil – as it seeks to shore up supplies of animal feed grains to meet soaring demand for high-protein food.

“We can source ample, and low-cost, grains by direct purchases from farmers in major grain-growing countries,” said Cheng Guoqiang, a researcher with the State Council Development and Research Centre, the think-tank of China’s cabinet.

Cofco’s participation in the global grain trade will also help China better track the world grain market, Cheng added.

The deal adds volume to Noble’s trading business via Cofco and allows it to reduce debt. Noble’s stock — which jumped as much as five per cent on Wednesday — has risen nearly 25 per cent since March 4, when Reuters broke the news that Cofco was in acquisition talks with it, adding about $2 billion in market value (all figures US$).

China is seeing massive expansion in demand for grains such as soybeans and corn, as the growing ranks of its middle class demand more meat in their diets.

Cofco bought a 51 per cent stake in Dutch trader Nidera late in February to gain direct access to South American grain and oilseed supplies in a deal that valued Nidera at $4 billion including debt.

The Noble and Nidera deals mark the biggest overseas acquisitions in China’s grain sector, with a combined $2.8 billion investment, Cofco said in a statement.

The company will own high-quality assets in the world’s top grain and vegetable oil producing regions, including Brazil, Argentina, Indonesia and the Black Sea area, following these deals, Cofco said.

The deals follow a wave of consolidation in the world agribusiness sector that has shrunk the number of potential acquisitions for it to bulk up enough to compete globally with larger rivals ADM, Bunge, Cargill and Louis Dreyfus, known as the ABCDs.

Sources of supply

The Noble acquisition allows Cofco to bring food supply into China without having to go through the ABCD pipeline, and will allow it to control costs better.

“By pushing the international strategy, Cofco will set up a stable grain corridor between the largest global grain-growing origins and the biggest global emerging market, in terms of grain consumption growth in Asia,” Cofco chairman Frank Ning said in a statement.

Noble’s grains and oilseeds operations focus on South America, Europe and Asia. It operates three oilseed processing factories in Asia, and supplies grains, oilseeds, vegetable oil and byproducts throughout the region from Singapore.

Noble, which is 14 per cent owned by sovereign wealth fund China Investment Corp., also trades sugar, coffee and raw materials, such as iron ore. Its agricultural division is the smallest, and generated revenue of $15.5 billion last fiscal year, accounting for about 16 percent of the firm’s total.

Under the terms of the deal, Cofco’s $1.5 billion offer serves as an initial cash payment upon closing, expected in the third or fourth quarter. The final price will depend on a multiple based on Noble Agri’s year-end book value and its debt will be rolled into the joint venture.

A consortium led by China-focused private equity firm Hopu will join Cofco as a minority investor in the acquisition and will hold a third of the investment vehicle making the purchase. Hopu is a private equity fund backed by Singapore state investor Temasek and run by the well known Chinese banker Fang Fenglei, with whom Goldman Sachs partnered for its China joint venture.

The final price Cofco pays will be 1.15 times the audited book value of the agribusiness division — factoring in Cofco’s 51 per cent ownership — for the financial year ending Dec. 31, 2014, according to the Noble statement. The audited book value was $2.8 billion by Dec. 31, 2013, it said.

Cofco and Noble still need to obtain regulatory and shareholder approval for the deal.

J.P. Morgan was sole financial adviser to Noble while Morgan Stanley advised the consortium that includes Cofco and Hopu.

— Naveen Thukral and Michael Flaherty report for Reuters from SIngapore and Hong Konh respectively. Additional reporting for Reuters by Elzio Barreto in Hong Kong, Rachel Armstrong in Singapore and Niu Shuping in Beijing.

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