Ten years after Buffett's big deal, Kraft Heinz eyes a breakup

[Food Giants Kraft And Heinz To Merge]
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The Kraft Heinz Company (NASDAQ:KHC [https://seekingalpha.com/symbol/KHC]) is reportedly close to finalizing a breakup of one of the country's largest food and beverage company into two entities, according to _The Wall Street Journal_, with an announcement likely to come next week.

Sources cited by the newspaper claim the food giant will split off its grocery business – which includes products like Kraft’s Macaroni & Cheese, Velveeta, Jell-O, and Kool-Aid – into an entity that would have a value of around $20B, with the remaining faster-growing segment that includes ketchup and sauces forming a separate and smaller entity. The transaction would essentially undo the 2015 merger between Kraft Foods Group and H.J. Heinz Company which created the third-largest food and beverage company in the U.S.

The combination was orchestrated in 2015 by Warren Buffett’s Berkshire Hathaway and 3G Capital under the terms which gave Kraft shareholders a 49% stake in the combined company and Heinz shareholders a 51% stake. Kraft shareholders received stock in the combined company and a special cash dividend of $16.50 per share, fully funded by an equity contribution by Heinz owners Berkshire Hathaway and 3G Capital. At the time of the merger, the two companies had combined revenue of ~$28B, an amount that would subsequently dwindle to $6.35B.

“I am delighted to play a part in bringing these two winning companies and their iconic brands together. This is my kind of transaction, uniting two world-class organizations and delivering shareholder value. I’m excited by the opportunities for what this new combined organization will achieve,” Warren Buffett said at the time of the merger.

In an effort to boost profits, the newly-formed Kraft Heinz Company (NASDAQ:KHC [https://seekingalpha.com/symbol/KHC]) immediately went to work cutting costs and going on a buying spree which included a failed attempt to acquire Unilever (UL [https://seekingalpha.com/symbol/UL]) for $143B in 2017.

Unfortunately, while the company was busy cost-cutting and looking for new toys, it failed to notice the shift in consumer tastes to healthier food options. With sales down amid a pivot away from processed cheese and hot dogs, the company finally conceded that its Kraft and Oscar Mayer brands were worth much less than it was valued at and took a $15B impairment charge. Additionally, then-CEO Bernardo Hees admitted that zero-based budgeting (in which every expense must be justified from a zero-base for each new budgeting period) had failed.

“We were overly optimistic on delivering savings that did not materialize,” Hess said in 2019.

Amid all the hand-wringing, the stock price continued to drop. After peaking in 2017, the company’s shares lost 61% of their value in the 10 years since the merger versus a 237% gain in the S&P 500. This led Berkshire Hathaway to take a second write-down on its 27.4% stake in Kraft Heinz (NASDAQ:KHC [https://seekingalpha.com/symbol/KHC]), this time for $3.8B after a $3B write-down in 2019.

Plagued by increased manufacturing costs, Kraft Heinz’s profitability was also dwindling and by 2025 the company fell into the red.

With few options left, the company is now considering splitting itself into two, a strategy that is unlikely to resuscitate the struggling food and beverage business.

“I do not see how the separation will raise any value,” says Seeking Alpha analyst Alan Galecki. [https://seekingalpha.com/author/alan-galecki] “My concern is that we’ll end up with two sick entities.”

“The proposed spin-off will require strong P&L gains between the two distinct entities, and empirical evidence suggests the KHC spinoff is not likely to produce new value for shareholders,” Seeking Alpha analysts TQP Research [https://seekingalpha.com/author/tqp-research] adds.

And Wall Street likely agrees. Since the divestiture talk first started circulating last month, Kraft Heinz (NASDAQ:KHC [https://seekingalpha.com/symbol/KHC]) shares have only gained 3% in value.

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* Kraft Heinz: Empty Bottle [https://seekingalpha.com/article/4807504-kraft-heinz-empty-bottle]
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