Kraft-Heinz

52 thoughts on “Kraft-Heinz”

1. Do you know the record date for the special dividend? Thanks

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   1. No. The deal is expected to close in the second half of this year. More details should follow, especially in the proxy.

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2. I'll preface this comment by saying that I'm not an analyst or a number cruncher. When dealing with buying public companies given that WEB will rarely issue BRK stock it must be hard for existing management to willingly sell out for cash. They would be giving up all upside. This deal to me is pretty creative in that KRFT shareholders got a premium ($16.50) as well as upside to come if 3G can work its magic. On top of that, they get Buffett as a 26%+ owner and board member. To me, I don't think one can go wrong in owning KRFT for those reasons. So, without crunching any numbers I bought a bunch yesterday (3/25) at the open.

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   1. It looks interesting. It's certainly fully priced including the synergies so one can't call it cheap. So to buy here, you have to think they will do better (actual figures may be better than the above as I don't take into account some things like lower interest rates on HNZ's current debt, improvement in cash flows etc.).

      Plus you have to think they can actually grow the business over time. A lot of people seem to be saying this deal is not so great because they are on the wrong side of eating trends (highly processed versus world moving to less processed/healthier).

      But at a reasonable valuation, you can do worse than partnering with Buffett and 3G.

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3. Is Kraft even allowend to sell outside US (Mondelez Spin-Off?)

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   1. Good point. Those license agreements roll off over the next few years. They didn't give details on the conference call but said there is some stuff in the Form 10 about them.

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4. Could it be possible that you are mixing up some numbers when calculating your double for BRK?

   I agree that he paid +/- 30 per share but he paid this for shares in the newCo (the one with 1220 s/o) and not the one currently listed on the market (at the price of 83 (or 66.7 ex div) and 588 s/o).

   I guess a more correct way to look at his current gains is determine a value based on your estimates of EBITDA. Take the 8 bn EBITDA number, slap on a 11x multiple (or whatever pleases you), get a 88 bn EV – net debt of 28 bn (insert debt reduction if it pleases) to arrive at an equity value for newCo of 60 bn, divided by 1220 shares gives you around 49 per share.

   Still not a bad deal (duh).

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   1. The 1.2 billion shares includes the old HNZ. So after the merger, BRK will own 320 mn shares in the new entity. For this common equity stake, he paid a total of $9.5 billion. So I think it's correct.

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   2. Yes but you are assuming those 1220 shares will trade at 66.7, right?

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   3. Yes.

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5. Any guesses on the eventual regular dividend? The other 3G companies seem to pay. Bud ~50% payout ratio and Ambev fluctuates between 20-50%.

   If they pay half, then that's 1.50 per share dividends

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   1. I haven't thought about that. But yes, I guess you can estimate something by plugging in various payout ratios.

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   2. They will keep the $2.20 annual dividend and will grow it over time. Net of $16.50 special dividend, that's a 3%+ yield. Not bad for an investment grade company when 10 yr tsy is >2%.

      One other point, the refi of HNZ debt and preferreds is expected to reduce interest expense. Any color on that?

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   3. Hi, the refinancing of the preferreds should save them $450-500 mn/year in cash according to the conference call (merger call). As for refinancing their debt, it would probably save them 100 bps or a little more but that assumes the ratings of KRFT doesn't change post-deal. On $14 billion of gross debt, that would be another $140 million+ in savings (pretax).

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6. thanks, hc.

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7. Do you understand why they are leaving so much equity on the table? Couldn't 3G and BRK (especially) used all the cash they have to get more equity since the huge cash position is a problem, and this company it so large. It seems like a missed opportunity. I am clearly missing something. Maybe 3G does not want BRK to have too much equity?

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   1. Yeah, I think it has something to do with BRK/3G partnering. They want it to be 50/50, probably. It would be awkard if BRK owned the other half (what the public would own after the merger) for a total of 75% or whatever, and then have 3G run it. Maybe a fund has to know that there is an "out". If the only exit was BRK buying the rest of it, they may not get a good price. I don't know…

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8. Thanks kk for this great analysis. 😉 Here is Matt Levine on it : http://www.bloombergview.com/articles/2015-03-26/so-buffett-will-only-get-to-triple-his-ketchup-money

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9. Interesting analysis. However couldn't help but thinking of Buffett's own "what you get, and what you pay" approach when thinking about this deal.

   Kraft shareholders are getting 1.37bn in EBITDA (49% of Heinz's 2.8bn) and paying (i.e. losing) 1.84bn (51% of Kraft's 3.6bn). In other words Kraft shareholders are losing c. 470m in EBITDA while Heinz shareholders gain that amount.

   Furthermore, they are also getting 8.8bn in new debt (49% of Heinz's 18bn) and shedding 5.1bn (51% of Kraft's 10bn). Thus, Kraft shareholders have 3.7bn more debt to be repaid than they did prior to the deal.

   However, the saving grace is the 10bn dividend Kraft shareholders receive (I take 10bn, although 588m shares x 16.50 = 9.7bn?). On an EV basis Kraft shareholders are getting 6.3bn (10bn dividend less additional debt of 3.7bn taken on) and giving up 470m in EBITDA. This would put the multiple at 13.4X EBITDA – a stiff but not ridiculous price for either party I guess.

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   1. That's one way to look at it. If Heinz was way bigger, then that sort of analysis makes more sense since you are giving up one stock with certain characteristics for another. But here, even though you are making an exchange exactly as you state, the more relevant question for me is what you started with and what you end up with. That's why I described my analysis the way I did. You start out owning a slow, stodgy stock with no real prospect before the deal, and after the deal you end up with a stock with similar proforma valuation with a much better outlook.

      The $1.5 billion in synergies will lead to value creation that will happen thanks to the deal so you have to incorporate that somewhere in the analysis.

      Plus, they will improve cash flows which is not included in my anaylsis.

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   2. Indeed. You need to consider things like ROCE, cash conversion and growth prospects to evaluate whether trading 1m EBITDA in Kraft for 1m EBITDA in Heinz is the same. Perhaps 1m at Kraft is worth 13.4X while 1m at Heinz is good for 15.4X (because of higher growth prospects, better cash generation, etc.). That seems to be the crux of your argument.

      I was merely pointing out that if you do what Buffett always says (look at both what you're receiving AND paying) then Kraft shareholders are getting roughly 13.4X EBITDA (a pretty decent multiple by any stretch). By participating in future synergies, cutting CAPEX, etc. (to the tune of 49% Kraft and 51% Heinz) Kraft shareholders are implictly getting a better deal (obviously this applies to Heinz as well which helps soften the headline multiple).

      If anything I'm agreeing with you – its not a bad deal for Kraft shareholders. Perhaps its a question of semantics. It just seems to me that rather concentrating on appraising the combined entity; it might be more useful (and simpler) to focus on the two building blocks;1) what is Kraft worth, and 2) what is Heinz worth, and then add your synergies etc,etc.

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   3. You are right. I just found it easier to go from the final entity and backwards and didn't feel the need to go much further. Anyway, thanks for the discussion.

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10. Fantastic post and great insightful comments!

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11. Great work! Thanks for sharing.

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12. Just because someone says there is going to be 1.5 Billion in synergies doesn't mean there are so I don't think one should pay full value for that regardless of anyone's track record.

    The math here shows 17.2 PE if you accept they achieve 1.5 Billion in savings. I don't see how that is a good buy. Sure if you get the shares at $30 like Buffett it's good deal. But I think anyone hold Kraft shares post the special dividend will be seeing a crappy long term return.

    I know one thing for sure. Buffett and 3G wouldn't pay $67 a share for Kraft/Heinz after the dividend was paid.

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    1. Well, we are all going to have various opinions on this. That's why I like to put as much information there as possible. So someone who wouldn't mind pay 20x P/E for the old KRFT, or the current KO, for example, might not mind paying 17x p/e for something with a real catalyst.

       It is certainly not your conventional value situation so I can understand many would not be interested in this at all. I don't own any, but am interested in the situation.

       Anyway, thanks for dropping by!

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    2. this is true….I would like to add as a searched around for analysis of the deal – this is the best I've found.

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    3. Curious how the above poster got 17x,not saying it's wrong just curious how he got there. Again thanks for the post, very helpful.

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    4. Oh, I just took the KRFT adjusted earnings per share from last year and then added the $1.5 billion synergies to it (and adjusted for tax) to get a 17x p/e for what HNZ is paying for KRFT. So that is where that number came from.

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13. skip the fancy math – Buffett wants 10% return – he is paying $30 a share for a firm that post synergies makes $3.00 per share. The other shareholders who aren't 3G – at 67 a share – they get 4.4%. If held Kraft share's I'd sure be unloading them because you're about to be diluted to a crappy return going forward.

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    1. This doesn't make sense. KRFT shareholders had a 5% earnings yield before the deal and you expect them to sell because now they have 4.4% earnings yield + better management + improved growth outlook? What??

       Also – this is supposed to be earnings accretive by 2017… so double what??

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    2. I wouldn't have held Kraft shares before the merger either. It was a crappy buy before and it's still a crappy buy.

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14. My point is that there is little to no dilution, but you state "You're about to be diluted to a crappy return going forward". This looks to be the opposite sort of deal. 4.4% estimate of current earnings yield vs. ~5% before the deal with growth prospects.

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15. "synergies" is cutting jobs. this is a financial transaction. depending on HNZ to grow your business is a fools errand.

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16. This comment has been removed by the author.

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    1. I think in the M&A world, people look at deals as "financial" transactions or "strategic". Financial buyer just means that the buyer is a private equity firm, merchant bank or something like that; a financial entity. A strategic buyer is usually an operating entity.

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    2. I see the point of Autonut's post now. Thanks.

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17. Does the cash distributed by the merger, will get taxed as a dividend? or no tax on 16.5 per share? thanks.

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    1. I haven't seen anything definitive (it might be somewhere) but I guess it wouldn't be taxed as a normal dividend; maybe a return of capital since the cash being paid out is not out of retained earnings and looks like new capital raised etc… But not sure.

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    2. Thanks a lot. I guess we have to wait for the merger agreement document…any idea when that might be out? is there a regulatory requirement as to the deadline for submission post announcement day? thx.

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    3. I don't know.

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    4. The merger proxy was filed by Heinz. (look for S-4). And it looks like the cash dividend will be taxed normally, but depends on your cost basis of KRFT shares. Here is a cut and paste. There should be more somewhere later in the proxy, but I just cut and paste the Q&A section at the beginning of the filing here:

       Q: What are the material U.S. federal income tax consequences of the merger, the subsequent merger and the special dividend to Kraft shareholders?

       A: The obligations of Kraft, on the one hand, and Heinz, on the other hand, to complete the merger are conditioned, respectively, on Kraft’s receipt of a written opinion from Sullivan & Cromwell LLP, tax counsel to Kraft, and Heinz’s receipt of a written opinion from Cravath, Swaine & Moore LLP, tax counsel to Heinz, each to the effect that for U.S. federal income tax purposes, the merger and the subsequent merger will be treated as a single integrated transaction that will qualify as a “reorganization” within the meaning of Section 368(a) of the Code.
       For U.S. federal income tax purposes, the special dividend, the merger and the subsequent merger should be treated as a single integrated transaction. As a result, both the Kraft Heinz common stock and the special dividend should be treated as received in exchange for shares of Kraft common stock pursuant to a transaction qualifying as a reorganization for U.S. federal income tax purposes. A Kraft shareholder who exchanges his or her shares of Kraft common stock for shares of Kraft Heinz common stock pursuant to the merger and receives cash in the special dividend will recognize gain, but will not recognize any loss, for U.S. federal income tax purposes. The amount of gain recognized will equal the smaller of (i) the amount of cash received in the special dividend and (ii) the excess, if any, of (x) the amount of cash received in the special dividend and the fair market value of the Kraft Heinz common stock received in the merger (determined at the effective time of the merger) over (y) the Kraft shareholder’s tax basis in the shares of Kraft common stock surrendered in the merger. Subject to the conditions and restrictions set forth in the section entitled “Material U.S. Federal Income Tax Consequences” beginning on page [—] of this proxy statement/prospectus, any recognized gain will generally be long-term capital gain if the shareholder’s holding period for the shares of Kraft common stock surrendered is more than one year at the effective time of the merger.
       For more information on the U.S. federal income tax consequences of the merger, the subsequent merger and the special dividend, see the section entitled “Material U.S. Federal Income Tax Consequences” beginning on page [—] of this proxy statement/prospectus. Kraft shareholders should consult their tax advisors for a full understanding of all of the tax consequences of the merger, the subsequent merger and the special dividend to them.

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18. Although intrinsic value appears to have increased for BRK in 2014 by 12+ %, BV increased only 8.3 %. If the $ 9.5 billion of BRK equity turns into $ 21 billion of Kraft-Heinz stock, then BRK BV will increase 4+ %.Odd that BRK price is down and people re pushing the Kraft price upwards.

    Thank you for your column. I work full time in medicine, and my investing is simply to provide for retirement, which I hope is 8+ years away, even though I am 62. Your writings are wonderful to follow, and fortunately for me, many of the companies you choose to review are ones in which I already invested. You have greatly helped me to better understand them as businesses. In my world we all devote time for which we are not compensated except with goodwill. Thanks for doing the same.

    LIMLaGrange

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    1. Thanks for the nice comment. And yeah, regarding BRK and KRFT, it's just Mr. Market being Mr. Market.

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19. I'd like to further discuss the warrants to purchase an additional 46 mm shares of Heinz Holdco common shares. In the 2014 10-K, it states that the Heinz Holdco warrants have a exercisable price of $0.01 share and expire on June 7, 2018. The question I have is how these warrants will be affected by the new transaction to merge KRFT/HNZ. The first thing that comes to mind, as a quick back-of-the-envelope estimate, is to look at the dilution that will occur to the common. Basically, BRK bought 425 mm shares of HNZ for $4.25 bn, then injected an additional $5.25 bn to own an eventual 320 mm shares of the combined company. The dilution in shares is roughly 0.75. So, taking this logic to the warrants, it seems that maybe the 46 mm will turn into approximately 35 mm (46 x 0.75). If this is so, and the exercisable price remains $0.01/sh (key IF, by the way…), then BRK will end up owning around 355 mm shares of new KFRT/HNZ for pretty much the same $9.5 bn investment. If all this is so, then the actual cost basis would be in the $26-$27/sh range. Thoughts? Am I missing something? Thank you all in advance for your comments!

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    1. That sounds about right. The warrants if not exercised will remain outstanding and will represent warrants to purchase Kraft Heinz. From the S-4:

       Ownership of the Combined Company
       As of the date of the registration statement of which this proxy statement/prospectus forms a part, entities affiliated with 3G Capital owned 425,000,000 shares of Heinz common stock (equal to approximately 46% of the Heinz common stock on a fully diluted basis) and Berkshire Hathaway owned 425,000,000 shares of Heinz common stock and, by exercising the Berkshire warrant, was entitled to receive an additional 46,195,652 shares of Heinz common stock (equal to, in the aggregate, approximately 51% of the Heinz common stock on a fully diluted basis). The remaining 3% of the fully diluted Heinz common stock was held by Heinz directors and management, including in the form of Heinz stock options and Heinz restricted stock units. In addition, 80,000 shares of Series A Preferred Stock were issued and outstanding and held by Berkshire Hathaway.
       As a result of the equity investments, the pre-closing Heinz share conversion and the merger, we expect that:

       • on a fully diluted basis, approximately 51% of the outstanding Kraft Heinz common stock will be held by shareholders that were shareholders (or were affiliates of shareholders) of Heinz immediately prior to the effectiveness of the merger (including 3G Global Food Holdings and Berkshire Hathaway) and approximately 49% of the outstanding Kraft Heinz common stock will be held by shareholders that were Kraft shareholders immediately prior to the effectiveness of the merger;

       • to the extent not exercised prior to the consummation of the merger, the Berkshire warrant will remain outstanding and will be exercisable for shares of Kraft Heinz common stock; and

       • the 80,000 shares of Series A Preferred Stock will remain issued and outstanding with substantially identical terms.

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20. Buying here at $69 with 3%+ yield?

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    1. Sorry for the late response. It is interesting, but everything is getting cheap! But no, I haven't bought any here…

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21. From your article:
    "…If we adjust the above figures, we can get $5.1 billion in EBITDA; that would bring the deal price down to 11x EV/EBITDA post-synergy. That would add close to $1.80/share in after-tax earnings per share. Add that to the $3.15/share and we get $5.00/share post-synergy EPS."

    From the Q1 2016 – For the Three Months Ended

    Adjusted EBITDA(2) 1,951 in millions
    Adjusted EPS(2) $ 0.73 $

    EBITDA seems even more than expected, EPS also not far off

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22. You should be worried about your dividends. This company's latest launch of "racey" Devour brand foods is not giving them a very good public image right now. Trying to insinuate food is like sex is a very bad move because it's the old thinking that sex will sell anything. WRONG. People in that caliber are the minority and those of us with brains realize very well what they are doing. I'm intellectually insulted and I will no longer buy their products. I don't need their poop that bad.

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23. Hi KK,

    It would be nice to see a follow up post on this with the recent news with Kraft Heinz.

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    1. Hi,

       Yes, interesting development. I don't own this and haven't been following so closely recently. It is kind of surprising, but it may be interesting here. I will take a look at it over the next few weeks and may post if I find anything interesting to say.

       One thing I will say is that I'm not sure this problem is really due to their cost-cutting as most people seem to say. I sort of felt that way with Lampert too, although in that case, the criticism of under-investment is probably a little more convincing (as their stores were definitely in terrible condition; I was actually scared to get into the elevator at their store in Astor Place, NYC, as it used to shake and grunt etc… lol…

       But these guys are facing problems of the changing times. Sears, for example, basically had no reason to exist and couldn't find one, really, over the years, investment or not. They couldn't complete with the likes of Best Buy, Home Depot, Lowes, Walmart, Target, and of course, Amazon.

       As for KHC, it's kind of similar as 'brands' just don't have the power that they once had, especially as millenials tend to see the establishment brands as evil, or unhealthy at best. So that's what they are fighting against, so it's not really the doing of 3G, I don't think, so much as the changing times which is hitting everyone.

       Of course, maybe they could have done better, but it's really tough in this new era, I think, so the issue is a lot more than just about cost-cutting or not.

       Anyway, this is very interesting and I don't really have any answers at the moment so stay tuned…

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