Tuesday 26 March 2019

$16bn plunge after Kraft Heinz admits old brands worth less

Shares down 27pc to hit a record low as investors question if food giant's belt-tightening has blighted its brands

Giant is controlled by Brazil’s 3G Capital and Warren Buffett’s Berkshire Hathaway. Photo: Bloomberg
Giant is controlled by Brazil’s 3G Capital and Warren Buffett’s Berkshire Hathaway. Photo: Bloomberg

Craig Giammona

Kraft Heinz shares fell to their record low on a slew of bad news, mainly centering on a multi-billion dollar write-down, which had investors wondering if years of rigorous cost cuts came at the expense of losing the value of marquee Kraft and Oscar Mayer brands.

The move put the spotlight on Kraft's slowing growth and the changing tastes of consumers, who have been shunning older, established brands for newer hipper products, cheaper private label brands and non-processed food.

The shares opened at $35.85 (€31.58), down 27pc, wiping off nearly $16bn from its market value. Berkshire Hathaway's Class B shares were down 1pc. Shares of rivals also fell, with Unilever and Nestle down between 3pc and 6pc.

Kraft Heinz, controlled by Brazil's 3G Capital and Warren Buffett's Berkshire Hathaway, has been combating higher transportation and commodity costs by tightening overall expenses. But that has come at a price. "Investors for years have asked if 3G's extreme belt-tightening model ultimately would result in brand equity erosion," JPMorgan analyst Ken Goldman said.

"We think the answer arguably came yesterday in the form of a $15bn intangible asset write-down for the Kraft and Oscar Mayer brands," said Mr Goldman, who cut his rating to "neutral" from "overweight".

Kraft also hit investors with the announcement of a regulatory probe, a chop in its dividend and a quarterly loss.

HJ Heinz merged with Kraft in 2015 in a deal engineered by 3G, and under its stewardship carried out extreme cost cuts that risked hurting the company's top line by stifling investment in innovation and marketing.

A year later, 3G was praised for making Kraft Heinz's operating margin the best among its peers, but that came at the cost of closing six factories and cutting 7,000 jobs in 18 months.

Analysts now doubt if 3G's model was effective, given that the company's margins before interest and taxes fell to 23.2pc in 2018 from 27.2pc in 2015.

"Kraft Heinz results confirmed all our worst fears - plus more," Guggenheim Partners' analyst Laurent Grandet said in a note.

Stifel downgraded the stock to "hold" from "buy" and more than halved its price target to $35, well below the current median target of $52.

"This is not your typical "reset the base and everything will be fine" story," Credit Suisse analyst Robert Moskow wrote.

"The dividend cut, the $15.8bn write-down of the Kraft and Oscar Mayer trademarks, and the guidance for further divestitures demonstrate the hallmarks of a company that has a serious balance sheet problem," Mr Moskow said.

Reuters

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