Kraft Heinz split: Cold cheeses are a burden for its hot sauces

Mint

5 days ago

When schools returned to in-person learning in the fall of 2021 after the pandemic, parents scrambled to find Lunchables to put in their children's backpacks.
Today, the meal kit of processed meats and cheese may be off the menu amid the desire for healthier food, but its manufacturer, Kraft Heinz, is firmly on it.
The company is exploring spinning off the division that makes Lunchables, alongside Kraft cheese and Oscar Mayer hot dogs from its faster-growing arm that makes ketchup.
A split could deliver modest value for shareholders. The biggest upside, though, would come from tempting bidders to pay up for each of the individual companies.
To recap: Warren Buffett's Berkshire Hathaway and private equity firm 3G Capital acquired J.H. Heinz for $28 billion, including debt, in 2013. Two years later, they merged it with Kraft Foods, the US grocery business that had been spun out of what would become Mondelez International (more on that later).
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But Kraft Heinz has grappled with changing consumer tastes and, most recently, the rise of GLP-1 weight-loss drugs. As sales have come under pressure, its shares have lost 70% since 2017.
Little wonder then that the company said in May that it was 'evaluating potential strategic transactions" to boost its stock price.
The logic for a split is straightforward. Kraft Heinz's sauces, spreads and condiments business, which generates annual sales of about $11 billion, is growing faster than processed meat and cheese.
People are seeking more flavour in their food, particularly if their appetites shrink—either because they are getting older or taking obesity treatments. Freed from their more sluggish sibling, brands like Grey Poupon mustard and Lea & Perrins sauce could command a higher valuation multiple.
There is a precedent here—ironically from Mondelez. After Kraft was spun off, Mondelez retained the sexier international, confectionary and snacking segments.
It has delivered a total return of over 200% since October 2012, almost double the S&P 500 Packaged Foods Index, and trades at a forward enterprise value-to-ebitda multiple of about 15.
Kraft Heinz's slower-growing grocery arm, which could have sales of about $14.5 billion, would be valued less generously. It would still be highly cash generative, though, so it could appeal to an investor looking for a steady dividend payer.
Analysts at T.D. Cowen estimate that the sauces, spreads and condiments division could be worth $29.5 billion and the grocery arm about $25 billion. Together, that's only just ahead of Kraft Heinz's enterprise value of $51 billion.
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Given that much of the upside might be swallowed by the higher costs of operating both companies, why bother with a breakup? Because both companies might prove tantalizing to a bidder.
This is exactly what happened in the case of Kellogg. The company spun off its North American cereals business as W.K. Kellogg Company in late 2023. The racier snack-foods arm, maker of Cheez-It and Pringles, was renamed Kellanova.
Almost a year ago, Mars paid $36 billion, including debt, for Kellanova, a 44% premium to the share price in the preceding 30 days.
Last week, privately held Ferrero International, maker of Nutella, agreed to buy W.K. Kellogg, whose brands include Froot Loops and Corn Flakes, for an enterprise value of $3.1 billion. The $23-a-share cash offer equated to a 40% premium to the share price in the preceding 30 days.
Kraft Heinz's sauces, spreads and condiments arm would fit in McCormick's portfolio, an analyst at Bloomberg Intelligence told me, although there may be competition concerns. And now that Unilever is offloading its ice-cream business, might it be interested in bulking up in dressings?
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As for the grocery business, it could appeal to a private equity buyer drawn to its cash flow. One complication is that Kraft Heinz is expected to have net debt of just over $18 billion at the end of this year, and much of that is likely to be allocated to the food maker.
This might make it harder for a financial buyer to load up on borrowings. Still, if this hurdle could be overcome, there could be scope to add other low-growth but cash-generative food businesses to build scale.
If both of Kraft Heinz's component parts are as successful in selling themselves as Kellogg's, this would certainly be a tasty treat for investors.
Since news of Kraft Heinz potentially doing the splits broke at the weekend, there has been much discussion of de-consolidation in the consumer sector. But like Lunchables leaving school bags, this looks more like a prelude to a corporate disappearing act. ©Bloomberg
The author is a Bloomberg Opinion columnist covering consumer goods and the retail industry.