[ad_1]
Kraft Heinz Co. might need a new recipe.
The packaged food giant announced Thursday a troika of bad news – a disappointing profit, a $ 15.4 billion asset write-down and a subpoena to the SEC – that dropped its stock up to # At 28%, reaching a record low on Friday, a drop that was worth more than $ 15 billion in market value.
This seems to be more than a bad quarter for hot dog maker Oscar Mayer and Kraft Cheese Macaroni. The findings raise existential worries about the investment thesis of a company created during a 2015 merger orchestrated by Warren Buffett and 3G Capital, a private equity firm known more for its zeal cost reduction than for its ability to feed mainstream brands.
Two years after the merger, Kraft Heinz attempted – and failed – to buy 143 billion Unilever as part of a transaction to continue to reduce costs and improve profit margins. He struggled to increase sales with a portfolio of exhausted brands, such as Capri Sun Maxwell House. Today, after a massive depreciation of assets, including the iconic brands Oscar Mayer and Kraft, and a shortfall due to higher than expected supply chain costs, questions arise. on the zealous reduction of spending at the heart of the 3G strategy.
"The cost-cutting mentality is like biting them," said Ken Shea, an analyst at Bloomberg Intelligence. "They need to get their house in order."
When Kraft Heinz was created, analysts wondered what would be the growth of this suite with a suite of aging brands, which also includes Jell-O and Kool-Aid. Changing consumer tastes and buying habits have decimated the sales of the largest agri-food companies in the United States, with buyers preferring more natural and organic products rather than pre-packaged, sugar-laden products. But it was not supposed to be of importance to Kraft.
3G, with the support of Berkshire Hathaway Inc. of Buffett, had achieved exceptional margins after taking over Heinz in 2013 and cutting back on expenses. That was the plan at Kraft and it worked for almost two years. The amalgamated company reduced its expenses by $ 1.7 billion, exceeding the announced target when the transaction was announced. And investors applauded, with shares rising north of $ 90 each, offering a significant premium for their counterparts in the packaged food sector.
But after the fat was reduced by Kraft Heinz, the management needed another deal to be able to start improving its profit margins again. Two years ago, the company launched a bid for Unilever. Following the announcement of the leak, Kraft Heinz shares closed at a record high. Since Unilever rejected the proposal, the company backed by Buffett is steadily declining.
Kraft Heinz's inability to make a big acquisition under Chief Executive Officer Bernardo Hees has highlighted his inability to boost sales. The depreciation reported on Thursday night, aimed primarily at reducing the goodwill value of its most renowned brands, was further evidence that the company had not managed its brands well, Shea added.
The charges resulted in a net loss of $ 12.6 billion, or $ 10.34 per share. The company also reduced its dividend and signaled to investors a subpoena received last year from the US Securities and Exchange Commission because of its buying practices. Kraft Heinz said that as a result of an investigation conducted with the help of an outside lawyer, the company had recorded a "$ 25 million increase in costs related to to the products sold ".
As a result of this bad news, the pressure will be even stronger to reach an agreement. Over the years, speculation about potential targets has focused on companies in the food sector such as Mondelez International Inc., General Mills Inc., Campbell Soup Co. and Kellogg Co. developing markets with the acquisition of a consumer products company.
Hees spoke of the "consolidation of the sector" when calling the results on Thursday, saying that Kraft Heinz was working to strengthen his balance sheet, likely to be able to pursue an agreement. Kraft Heinz said it would regain earnings growth in 2020 and that its strong operating margins would give it "balance sheet flexibility for future consolidation".
If the Bank of Buffett is still open, Kraft Heinz may still be able to conclude a transformative deal. But with its shares falling to record levels and big questions about strategy, it may be even harder to make a big buy – something that has already been difficult -.
Berkshire Hathaway's investment rose from about $ 15.7 billion to $ 11.4 billion, as the stock fell below $ 35 on Friday.
"Kraft Heinz must be a consolidator and they have not done it yet," said Scott Mushkin, Senior Analyst at Wolfe Research, in an interview with Bloomberg Television. "You are in an industry that is experiencing very important structural problems and one of the things you can do to try to offset that is to bring some of these companies together."
Bloomberg and Aviel Brown and Nancy Moran contributed.
[ad_2]
Source link