Kraft Heinz Failed Merger To End In Spinoff
Kraft Heinz (KHC)’s board has completed its summer homework and turned in the assignment. In July, we discussed reports that Kraft Heinz would spinoff its grocery business, and, immediately after Labor Day, after the last slow days of summer, the grocery spinoff is official. As is typical, the announcement trumpets the benefits of splitting up, but forgets to note that a decade ago they were trumpeting big gains from the merger that they are now undoing. I guess Europe calls spinoffs “demergers” for a reason.
Kraft Heinz Spinoff Rationale
Kraft Heinz uses the normal boilerplate to explain why the spinoff is a good idea:
The separation is designed to maximize Kraft Heinz’s capabilities and brands while reducing complexity, allowing both new companies to more effectively deploy resources toward their distinct strategic priorities. This focus will enable stronger performance while preserving the scale to compete and win in today’s environment.
In other words, they are too big now to manage effectively, but after the spinoff each company will still be big enough to compete, but not too big, just the right size. Goldilocks would be satisfied indeed. Each company will have three billion dollar brands, over $10 billion in annual revenue, and $2 billion in annual EBITDA.
Of course, despite having the whole summer, the new companies don’t have names yet- I guess the overpriced branding consultants were off. Kraft Heinz- if you want a quality branding solution, feel free to drop me a line – my prices are quite reasonable, and I guarantee it will be better than Mondelez.
Global Taste Elevation Co.
I’ve never heard of “Taste Elevation” before, but it seems like it’s a term Kraft Heinz invented and has been using for a while. I guess it sounds better than “MSG” or “Taste Enhancing Chemicals”. In any event, this division includes sauces, condiments, spices, and … Cream Cheese and Mac & Cheese? You can only draw the line through so many disparate items, I suppose.
“Global Taste Elevation Co.” – a global leader in Taste Elevation and shelf-stable meals with approximately $15.4 billion in 2024 net sales(1) and approximately $4.0 billion in 2024 Adjusted EBITDA(1). This company will include a roster of iconic brands and local jewels, with three billion-dollar brands – Heinz, Philadelphia and Kraft Mac & Cheese – with approximately 75% of net sales coming from sauces, spreads and seasonings. Approximately 20% of 2024 net sales are in Emerging Markets and approximately 20% are in Away From Home. This company will be well positioned to drive industry-leading growth across attractive categories and geographies, leveraging a proven go-to-market model and the Brand Growth System to deliver scale and performance.
I’m not sure what the “Brand Growth System” is, but capitalizing makes it sound really impressive, and Kraft Heinz’s recent dismal performance probably means it’s great.
North American Grocery Co.
The brown bag lunch business, probably hurt by both universal free school lunch programs that came into being over last 5 years and by backlash against processed foods. This company is defined by top brands in declining markets.
“North American Grocery Co.” – a scaled portfolio of North America staples with approximately $10.4 billion in 2024 net sales(1) and approximately $2.3 billion in 2024 Adjusted EBITDA(1). This company, which will be led by Carlos Abrams-Rivera, will include a portfolio of beloved brands, including three billion-dollar brands – Oscar Mayer, Kraft Singles and Lunchables. Approximately 75% of net sales come from brands that are #1 or #2 in their respective categories. This company is expected to generate reliable free cash flow through operational efficiency across stable growth categories and through the pursuit of growth opportunities for its brands in existing categories, adjacencies and Away From Home.
Dis-synergies – We Used To Call Them “Costs”
“The Company anticipates up to $300 million of dis-synergies.” The term “dis-synergies” was new to me, but a quick google search shows it has a short and checkered history. It’s another one of those euphemisms that consultants like to use to distract you from the money missing from your wallet. Let’s make it simpler: undoing the failed merger that has cost shareholders billions will cost them another $300 million. When does the making money start?
The company expects the transaction to close in the second half of 2026 and be tax free to shareholders. At some point between now and then, they will get around to telling us the name of each company, which assets will go to which company, capital structure and leadership.
Buffett And Berkshire Hathaway, Largest Kraft Heinz Holder, Not A Fan Of The Kraft Heinz Spinoff
Berkshire Hathaway (BRK-B), is Kraft Heinz’s largest shareholder with 27.5% ownership. CEO Warren Buffett spoke with CNBC about the Kraft Heinz spinoff this morning, and he is not happy.
Warren Buffett told CNBC on Tuesday that he is disappointed in the Kraft Heinz split that unwinds much of the blockbuster merger he masterminded a decade ago.
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Buffett told CNBC’s Becky Quick on Tuesday that the merger didn’t turn out to be a brilliant idea, but he does not think that taking the company apart will fix its problems.
Greg Abel, who will take reins at Berkshire Hathaway from Buffett at the end of the year, expressed disappointment to Kraft Heinz, according to Buffett.
It’s pretty strange that the company would move forward with this spinoff plan in the face of opposition from its largest holder who also happens to be perhaps the most successful investor of the last 75 years, but this isn’t a management team with a track record of making good decisions.
The stock, which had been slightly up, began moving down with Buffett’s remarks and currently stands down almost 7% on the day.
A Spinning Out Of Control Kraft Heinz Tries A Spinoff As It Flails to Regain Relevance
Kraft Heinz’ problems are not new. What scale didn’t solve, spinning off won’t solve. To the extent that the spinoff allows for competent management to take the reins, perhaps there is a glimmer of hope for shareholders. But, more likely, as this falling meteor breaks into 2 pieces, each keeps streaking downward.
Disclosure: The author holds shares of Berkshire Hathaway.
Absolutely brilliantly written! They shld call you for naming rights!!!