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December 15, 2016

Don’t rule out Kraft and Mondelez going back to the future – editor’s viewpoint

The speculation linking Kraft Heinz to a possible bid for Mondelez International is casting just-food's mind back seven years and giving it a wry smile at the thought of a company reunited.

By Dean Best

The speculation linking Kraft Heinz to a possible bid for Mondelez International is casting just-food’s mind back seven years and giving it a wry smile at the thought of a company reunited.

It was Christmas 2009 when your correspondent was in the middle of covering one of his favourite stories of his time on just-food – the then Kraft Foods Inc’s pursuit of the then independent and – initially – resistant Cadbury plc, with the US group insistent the US confectioner would benefit from increased scale.

The saga didn’t stop for the holidays. Every year, the very generous (they’re reading) powers-that-be at just-food Towers do give us Christmas off, allowing us to put down our quills until early January and that festive period was the same, although your correspondent got sucked into – entirely of his own volition – chewing the fat with Ferrero as speculation swirled the Kinder maker was mulling a tabling its own bid for Cadbury. By 19 January 2010, it was all over. Kraft sweetened its bid and the Cadbury board accepted it.

Almost eighteen months later, Kraft stunned the industry when it announced plans to divide in two, with Cadbury joining other snacks brands in a standalone business, arguing its snacks business, including Cadbury and Oreo biscuits, would benefit from increased focus.

Kraft Foods split in October 2012, creating Cadbury and Oreo owner Mondelez International and US grocery business Kraft Foods Group. Mondelez went its own way, touting its presence in faster-growing emerging markets; Kraft Foods Group saying it could benefit from a combination of its household brands in the US and making the business leaner.

Two-and-a-half years later, Kraft Foods Group was sold to Heinz, the US company itself acquired in 2013 by Brazilian private-equity firm 3G Capital and Warren Buffett’s Berkshire Hathaway investment fund.

Still with us? Good. 3G Capital and Warren Buffett’s move for Kraft Foods Group was in March 2015 – and the establishment of Kraft Heinz was complete in July. 3G Capital’s entry into the packaged food sector has had a dramatic effect on the way many of the major names in the industry operate and, ever since Kraft Heinz was formed, there has been a lot of talk about where the private-equity firm could look next.

Is it about to go back to the future?

Shares in Mondelez jumped in after-hours trading in New York yesterday (14 December) after reports surfaced Kraft Heinz could be preparing a takeover attempt for the business.

Swiss magazine Bilanz suggested Kraft Heinz could be lining up a move for Mondelez, claiming 3G Capital is already mobilising for the transaction.

In November, Brazilian reports suggested investment firm 3G Capital is raising US$8-10bn to fund more acquisitions. At the time, the news sent shares in groups including Mondelez, Campbell Soup Co., Kellogg and General Mills higher.

Speculation Mondelez could become a takeover target for 3G Capital have circulated since the group’s failed attempt to acquire fellow US chocolate maker Hershey this summer, with some pundits suggesting the group lacks the scale needed to remain independent in a consolidating marketplace.

A spokesperson for Kraft Heinz told just-food the group would not comment on the report. According to Bloomberg, citing unnamed sources, the groups are not in talks over a deal. A source at Mondelez, speaking under the condition of anonymity, suggested Kraft Heinz has not contacted the company regarding a takeover move.

As things stand, it is hard to know what the situation is. That it is Mondelez that is being said could be 3G Capital’s next target is not a surprise. The prospect of a combination between Mondelez and Kraft Heinz has been the subject of talk in the market on and off for a year and spiked when activist shareholder Bill Ackman bought a stake in the snacks maker last year. At the time, Buffett appeared to pour cold water on the prospect of Kraft Heinz making a move for Mondelez – in the near term at least.

This summer, some on Wall Street believed part of the reason Mondelez moved for Hershey was to bulk up and make it less likely to be the subject of a takeover bid itself. If Mondelez wants to expand in confectionery, analysts argued, it should continue to look for acquisitions. However, Pablo Zuanic, an analyst covering Mondelez at US investment and trading firm Susquehanna International Group, said: “In the end, we think Mondelez will just run out of time and will be taken over – by Kraft Heinz.”

Zuanic was also musing about 3G Capital moving for Mondelez on Friday in the wake of Warren Buffett’s son, Howard, relinquishing his seat on the board of Coca-Cola Co. The analyst suggested the exit of Buffett Jnr could pave the way for Buffett Snr to sell his stake in Coke. “The circa US$17bn proceeds could come in handy helping 3G/Kraft Heinz fund their next deal. Mondelez?”

Among the analysts on Wall Street to have suggested 3G Capital could look at Mondelez as a possible target is Sanford Bernstein’s Alexia Howard, who suggests the private-equity firm would be interested in the snacks group’s presence in faster-growing emerging markets, although she has posited it could move for General Mills first. Howard told just-food today: “Putting aside the chatter today, it does seem to make sense that Kraft Heinz would be looking to do another deal in 2017, and that therefore they would now be doing the rounds to see what might shake loose. We suspect that General Mills and Mondelez are the frontrunners, and I think that’s the view that investors have, but it’s hard to say which is more likely, since availability and willingness to sell is likely to be critical.”

At Morningstar, Erin Lash points to the “references” Kraft Heinz’s management has made to “remaining a consolidator in the space” but wonders whether the company, which has cost control at the centre of its strategy, will want to take on debt to make more deals at the moment. “Assuming that valuations in the space continue to trend higher, Kraft Heinz could be prompted to pay an excessive premium for its next tie-up, which would place an added burden to derive the synergies it would likely target. Finally, our stance is supported by management’s bent toward reducing its debt balance, as total debt/adjusted EBITDA stood at 3.6 at the end of fiscal 2015, above the two to three times its peers boast. As a result, we don’t think the firm maintains an appetite to take on additional leverage presently.”

There’s plenty to ponder and the industry has been doing that today, not least with plenty of sardonic comments about a deal that would bring the likes of Kraft cheese slices and Cadbury Dairy Milk again being in the same portfolio.

Could the deal happen? It would be a surprise if 3G Capital didn’t move in 2017 – and wouldn’t be one if it moved for Mondelez.

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