What Happened to The Kraft-Heinz Merger?
The merger between the H.J. Heinz Company and Kraft Foods Group was approved by each company’s Board of Directors and shareholders in the beginning of 2015. In July of 2015, investors 3G capital and Berkshire Hathaway teamed up to create the new Kraft Heinz Company, of which they held a 51% stake in.
As a publicly traded company, other shareholders of Kraft, would hold the remaining 49% of Kraft Heinz. In addition, each share owned of the Kraft Foods Group company, prior to the merger, would equate to exactly one share of the new company. These additional shareholders would also receive $10 billion in total dividends, which equated to about $16.50 per share, paid by both 3G Capital and Berkshire Hathaway. The expectations for this new firm were immense, as shareholders anticipated large returns, decreased costs, and a larger influence around the world.
As a completely new firm, new executives would need to be appointed. Using the old companies’ respective executives to do so is a path that many post-merger firms choose to take, and Kraft Heinz was no different. Bernardo Hees, CEO of Heinz prior to the merger, was appointed CEO for the newly-formed Kraft Heinz Company. Alex Behring was appointed Chairman, and John Cahill, Kraft’s CEO prior to the merger, was appointed Vice Chairman. But, Behring & Hees are private equity executives with backgrounds in financial engineering. Though both are brilliant individuals, they are investors at the end of the day.
Due to Heinz’s global reach, the combination of the two companies aimed to increase revenues and profits by bringing some of Kraft’s big-name products, such as A.1, Velveeta, MiO, Lunchables, and Planters, to the international market. They also envisioned cost cuts, which would come in the form of reducing human capital, as well as better opportunities for bargaining with retail outlets, restaurants, and food companies.
Fast forward to 2019, and Kraft Heinz has not performed nearly as well as expected.
Instead, the company has been losing a significant amount of steam, and is causing analysts and shareholders to rethink the future of the company. Many analysts believe that instead of adapting to changing consumer preferences, Kraft Heinz focused heavily on cost-cutting, alienating their market, and taking steps backward in the growth of their company.
Nowadays, healthier alternatives to everyday snacks are becoming increasingly popular, and Kraft Heinz has missed the boat in pursuing acquisitions of branded companies in this sector such as Amplify, B&G Foods, and Pinnacle, who own SkinnyPop, Pirate’s Booty, and Smart Balance, respectively. The aim of financial engineering profits by merging two great American consumer brands failed due to a consumer's preferences changing faster than anyone had anticipated, including Warren Buffett.
Amidst these operational issues, Kraft Heinz has also faced some legal and structural issues. The SEC recently launched an investigation into Kraft Heinz for procurement misconduct, forcing the firm to restate its financial statements for both fiscal years 2016 and 2017, and raising questions about the firm’s accounting processes.
CEO Bernardo Hees is also said to be stepping down on June 30, and will be replaced by Miguel Patricio, Anheuser-Busch’s chief marketing officer. While Kraft Heinz’s future may be in question by analysts, shareholders, and the public alike, an outsider may be just what the firm needs to change the direction of its business, and meet the expectations set for the 2015 merger.
Written by Matthew Durborow, Edited by Themis Pappas & Alexander Fleiss
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