Kraft Heinz merger not mixing well
The Pittsburgh-based company that Henry John Heinz started in the late 1800s ended up in a merger with the former Kraft Foods, with the result leaving a bad taste in the mouths of investors and stockholders.
Kraft Heinz Co. was formed in July 2015 amid hopes of generating more profits by joining two food and beverage production giants with diverse product lines. The growing pains have not gone away. Global sales in 2018 slipped to $26.2 billion and the company posted a net loss of $10.2 billion. When Kraft and Heinz were operating separately, the two companies generated a total of about $28 billion in annual revenues.
The company took a $15.4 billon write-down in February, reflecting a drop in the value of the company’s assets. Net income for the first six months of the year plunged to $852 million, down from $1.75 billion for the first six month of 2018. Sales took a dive as well, falling to $12.3 billion for the first half of the year, from $12.9 billion for the same period in 2018.
As if that was not bad enough, the Securities and Exchange Commission subpoeanaed Kraft Heinz in October 2018 over its accounting practices related to its procurement procedures, according to the company’s annual report for 2018. An internal investigation also found financial misstatements regarding supplier contracts, according to the annual report. The company had to restate quarterly financial reports from April 2017 through September 2018.
Christopher Growe, a managing director of the investment bank Stifel Nicolaus, has rated Kraft Heinz stock as a “hold” based on expectations on continuing uncertainty and a weaker near-term outlook as the company tries to restore profitable growth to its business.
In a report issued in September, Growe believes the company might have to sell some of its assets or cut its dividend. Spending on marketing is so low that it is an indication of a company not investing sufficiently in its brands, which leads to lackluster growth.
As the company undergoes its strategic review, Monica Aggarwal, managing director for Fitch Ratings, expects Kraft Heinz will highlight the brands and businesses it will invest in while potentially identifying assets that are non-core to the business.
“This could include a large legacy brand that either requires significant investments to stabilize or could be sold at a reasonable multiple to help deleverage the balance sheet,” Aggarwal said.
Fitch has revised its ratings outlook for Kraft Heinz from stable to negative. That reflects the uncertainty around the company’s future strategy and the amount debt, given the deterioration in Kraft Heinz’s financial performance.
Heinz had remained in control of its own destiny until June 2013, when Warren Buffett’s Berkshire Hathaway and 3G Capital, a New York-based global investment firm, acquired H.J. Heinz in a $23.3 billion deal. It was a sweet deal for Heinz shareholders, who were paid a 19% premium to the record-high price of their Heinz stock.
Not content with Heinz as a stand-alone firm, Buffett and 3G Capital teamed up again to complete the merger of Heinz and Kraft Food Groups, forming the third-largest food company in the United States with about 200 brands.
By the time Buffett bought Heinz, the company no longer produced food in the Pittsburgh area. It had sold its North Side plant to competitor Del Monte Foods in 2002.
Kraft Heinz has 38,000 employees globally, but the company did not reveal how many remain in the Pittsburgh offices. The company does not break down employment by location, said Michael Mullen, a Kraft Heinz spokesman.
Joe Napsha is a Tribune-Review staff writer. You can contact Joe at 724-836-5252, [email protected] or via Twitter .