The partitioning of Kraft Heinz immediately evokes thoughts of the separation of Kellogg Co. in 2022-23 and whether the split opens the door to M&A. A host of potential scenarios could play out before the current uncertainty is quashed.
It’s perhaps that uncertainty that saw Kraft Heinz’s shares end the day in the red yesterday (2 September) as the separation was confirmed but not set in stone. Final details will not be concluded until the back half of next year.
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For a US food industry fighting to revive volumes, margins and revenue growth in the wake of inflation-linked pricing, which in some respects has been quantified as excessive, a lot of water can flow under the bridge in that time.
For Kraft Heinz, and for some of its big food US peers, there’s also the question of bloated portfolios that are hard to manage and grow effectively, along with houses of legacy brands that don’t necessarily appeal to younger generations.
Hence the rolling back of the 2015 mega merger of Kraft Foods and HJ Heinz, a merger instigated by billionaire investor and Berkshire Hathaway owner Warren Buffett in partnership with 3G Capital.
Buffett “overhang”
Buffett, incidentally, who holds around a 27% share in Kraft Heinz, was said to be ‘disappointed’ with the marriage break-up, as reported by CNBC yesterday. As the company’s largest single shareholder, a key question now is whether he will remain invested in the $26bn revenue business (2024).
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By GlobalData“We expect Berkshire’s tenuous ownership position to continue to pressure the shares,” TD Cowen analyst Robert Moskow wrote.
“These comments reinforce our view that Berskhire’s position represents an overhang to the stock due to the likelihood they will exit their position.
“Also, we believe the long waiting period for the split to occur represents an overhang, too. For example, Kellogg stock underperformed the Consumer Staples index by 12% during the circa 1.5-year period between split announcement in 2022 and finalisation in 2023.”
In Kraft Heinz’s presentation words yesterday, the split “offers the optimal path to accelerate profitable growth and by doing so, driving higher levels of long-term value for shareholders”.
The company added: “At the same time, we recognise that we have one of the most complex portfolios in CPG, competing in more categories than any other company in the space. We believe that focus allows for a range of operational benefits and is a common trait among higher-growth companies.”
Kellogg flashback
Market machinations aside, top of mind is the likelihood of a déjà vu scenario emerging in the context of Kellogg. A planned split of that business was announced in mid-2022 and completed late in 2023 in what materialised as the companies of WK Kellogg and Kellanova.
Fast-forward to 2025, Ferrero and Mars stepped in to buy those businesses, albeit with completion in the hands of regulators.
Will Kraft Heinz, set to be reincarnated into two separate publicly listed entities next year, eventually end up going down the same route? Management appears to have left the door open, judging by yesterday’s language.
“Leading gross margins, combined with reduced operational complexity and lower volatility, set the stage for Global Taste Elevation Co. to generate attractive discretionary cash flow,” the presentation read.
But more revealingly, Kraft Heinz said: “This, in turn, unlocks financial flexibility – whether that be to reinvest in the business, future M&A, or further capital return to shareholders.”
Global Taste Elevation, the name attached to one of the spin-off businesses for now, generated sales last year of $15.4bn and an adjusted EBITDA print of around $4bn, according to Kraft Heinz. Post-division, it will revolve around sauces, spreads and seasonings (legacy HJ Heinz), and includes brands such as Heinz, Philadelphia and Kraft Mac & Cheese.
The smaller “staples” unit identified as the ‘North American Grocery Co.’ had sales of $10.4bn and an adjusted EBITDA of around $2.3bn last year. It will feature brands such as Oscar Mayer, Kraft Singles and Lunchables.
M&A murmurings
Kraft Heinz said in its presentation the division is “expected to consistently generate strong cash flow to support efficient capital allocation, including a highly competitive dividend”.
But read what you will into the follow-up sentence: “It also has the financial flexibility to consider strategic transactions, leveraging our capabilities in operational efficiency.”
Bernstein analyst Alexia Howard questioned the intentions for North American Grocery during a Q&A session yesterday with Kraft Heinz management, framing her approach in the context that acquisitions might just “fly in the face” in terms of the focus of the split.
Carlos Abrams-Rivera, who will remain as group CEO until the partition and then take the helm of the new grocery unit, was non-committal.
“How do we actually drive further focus? he countered rhetorically. “I actually believe that scale does matter but that still has to be linked to focus. So to the extent that there are areas that can help us drive further focus that could be a transaction that we can entertain for the future.”
Howard presented some observations on the potential path forward in a follow-up research note posted after yesterday’s Q&A.
“This is an intriguing prospect for the industry more broadly, since we have pointed to the substantial cost synergies that could be generated through further consolidation, particularly in light of Kellogg’s recent separation into Kellanova and the WK Kellogg company and now likely subsequent mergers with Mars and Ferrero, respectively.”
Interestingly, she said North America Grocery could potentially land in the hands of US peer Conagra Brands, “although this would not fit with management’s [Kraft Heinz] stated objective of preserving focus”.
Howard even suggested, with an emphasis on “perhaps”, the possibility of an “eventual acquisition of the Taste Elevation company by another more global food company like General Mills or one of the larger European names”.
Joining CEO Abrams-Rivera and CFO Andre Maciel on yesterday’s analyst call was Miguel Patricio, who was at the helm of Kraft Heinz from mid-2019 to January 2024.
Patricio, who is now executive chairman, hammered home the focus theme as a key characteristic of the intended separation.
This split is about two great companies with great brands and great possibilities
Miguel Patricio, Kraft Heinz
“This split is not between a good company and a bad company. This split is about two great companies with great brands and great possibilities. It’s really a split thinking that focus will help us tremendously.
“Operating with 56 different categories, we have to make and define priorities when we are taking decisions. By dividing this company, we are going to give the attention that part of this portfolio is not getting right now.”
Operating with scale
Returning to the scale topic put forward by Abrams-Rivera, a point emerged yesterday that the Kraft Foods and HJ Heinz merger was built on the concept of scale, yet too much scale and complexity are now resulting in the unwinding.
CFO Maciel explained in response: “Scale does matter and we were intentional in making sure that we preserve the scale in those geographic situations and markets that we are competing in. What I will say is scale by itself is not enough.
“[A separation] actually allows us to make sure that we have that level of focus now as we go forward, and at the same time maintaining a level of scale that I think is important to compete in this marketplace.”
Kraft Heinz expects to incur around $300m in so-called dis-synergies from the business split, or in other words the disruptions that can occur from M&A transactions.
Maciel said the costs mainly revolve around cost of goods sold (COGS), logistics but with “minimal overlap in manufacturing”, IT costs, sales and marketing functions, and “duplication of corporate functions”. Job losses no doubt?
David Clark, the former General Mills executive and now consultant, said the dis-synergies are “not huge” but do present a “headwind” as he looks toward how Kraft Heinz will “build the value creation bridge” post-transaction.
This reads just like the Kellogg split two years ago – better focus, better capital allocation, reduced complexity
David Clark, Avenir Strategies
Writing on LinkedIn, Clark also suggested that one of Kraft Heinz’s new business units might end up in the hands of another party.
“This reads just like the Kellogg split two years ago – better focus, better capital allocation, reduced complexity. Kraft Heinz is following the playbook, and I’m sure hoping there is a match for one, if not both, of these companies,” he said.
Kraft Heinz, meanwhile, has built its planned split on five principles.
Quoting from the initial statement, the company proposed the split “delivers long-term sustainable value creation; preserves the financial discipline that is part of our DNA; ensures that we maintain relevant scale while at the same time minimising complexity and dis-synergies; maximises the value of our iconic portfolio of brands; [and] all while maintaining attractive capital returns while preserving balance sheet flexibility”.
John Baumgartner, a managing director at Mizuho Securities, greeted yesterday’s initial announcement as being largely in line with market expectations following Kraft Heinz’s revelation in May of a strategic review and the media reports in July of a business separation as the likely outcome.
However, he said there are still “lingering growth questions”, before writing in a follow-up note post the Q&A session that “street scepticism remains high”.
With the final details and complexities of the split not due until late next year “ample time exists for Kraft Heinz to demonstrate improved competitiveness, which may enhance the street’s willingness to place higher valuations on ensuing businesses”, Baumgartner suggested.
The future of Oscar Mayer
Further asset disposals could also ensue in the meantime, he added, building on the recent divestitures. Speculation has revolved around the future of Oscar Mayer in the portfolio, for instance, for some time.
“We believe the clearest path to upside for shares would be a divestiture of Oscar Mayer and/or renewed share gains/volume growth…Asset sales (notably Oscar Mayer) could prune material underperformers and enhance portfolio growth prospects. We believe strategic acquirers exist, and that asset sales can prove accretive for shareholders,” Baumgartner wrote.
Nevertheless, disposals would dilute the sales propositions put forward for the individual businesses before the final split conclusions are made, another uncertainty for the time being.
And Kraft Heinz has yet to name who will lead the larger Global Taste Elevation unit, with an executive search underway. In the wider scheme of things, the big question is whether Kellogg, and now Kraft Heinz, have set a precedent for hefty US food majors, and over in Europe too. The future of food at Unilever, for instance, has long been a point of contention.
Peter McDonald, also a former General Mills executive turned consultant, suggests Kraft Heinz is where it is because the business “can’t grow”.
Reflecting on the 2015 merger and Kraft Heinz’s pressured shares yesterday, McDonald wrote on LinkedIn: “The current team is doing the rebuild work but recovery is still in progress, ten years after the merger. If growth remains elusive, this isn’t transformation – it’s financial engineering, divorced from the consumer.
“And we’ve seen how that movie ends. With the stock down 5% in early trading following today’s news, perhaps investors see this as the ultimate, unaddressed problem as well.”
