Analysis-Kraft Heinz seeks to revive old brands by undoing 2015 mega-merger

By Jessica DiNapoli and Abigail Summerville

NEW YORK (Reuters) -Kraft Heinz's potential spinoff of slower-growing brands such as Velveeta cheese is a risky last-ditch effort to boost returns by reversing its unsuccessful decade-old merger.  

The Chicago- and Pittsburgh-based foodmaker is studying a potential spinoff of a large chunk of its grocery business, including many Kraft products, into a new entity, a source said on July 11, confirming a report in the Wall Street Journal. That entity could be valued at up to $20 billion on its own, which would make it the biggest deal in consumer goods so far this year. 

The company declined to comment on the move.

Shares in the food maker have lost about two-thirds of their value since Kraft and H.J. Heinz merged in 2015 in a deal backed by Warren Buffet's Berkshire Hathaway that was aimed at cutting costs and growing the brands internationally.

U.S. consumers, however, have been spending less on increasingly expensive name-brand packaged food after the pandemic.

In addition, Kraft Heinz's convenience-oriented products like its Lunchables meal kit face scrutiny in the United States, its biggest market, amid the rise of the Make America Healthy Again or MAHA social movement led by U.S. Health Secretary Robert F. Kennedy Jr.

The $33.3 billion market-cap company said in May that it was "evaluating potential strategic transactions to unlock shareholder value" as executives from Berkshire Hathaway left its board, most likely after losing faith in the food maker, bankers said.

The potential move, yet to be confirmed by Kraft Heinz, would likely undo the approximately $45 billion 2015 merger, though the details of how the company's roughly 200 brands would be split up are unclear.

It also is not a sure bet for investors, because they would reap the most value only if acquirers step in to buy either of the new companies, analysts said.

Kraft Heinz's condiments division, led by ketchup brand Heinz and Philadelphia cream cheese, posted $11.4 billion in sales last year and has room to grow internationally.

On a standalone basis, it would likely command a higher multiple than what the overall company is currently trading at, making it more valuable, analysts and bankers said.

The rest of Kraft Heinz's products - with sales of $14.5 billion from legacy brands such as Oscar Mayer which face competition from cheaper private-label options - would likely be valued in line with the whole company, which currently trades just below nine times its earnings.

Kraft Heinz did not immediately return a request for comment.

RISKY PATH 

This path is dicey because the separation alone may create only a small benefit for investors, according to analysts and investment bankers.

Bigger returns hinge on Kraft Heinz eventually finding a buyer - and a premium - for either of its two businesses. 

"It doesn’t look like there’s a whole lot of upside," said Bank of America analyst Peter Galbo. "It really is reliant on an acquisition down the line." 

Kraft Heinz's board and management may have looked at the breakup of the Kellogg Co as a success story they could replicate, investment bankers said. 

Earlier this month, European candy maker Ferrero agreed to acquire Kellogg Co's cereal business, WK Kellogg, for $3.1 billion. Last year, Mars scooped up Kellogg Co's other business, Pringles maker Kellanova, for about $36 billion.

Possible acquirers for the condiments business could be spice and hot sauce-maker McCormick Co, Unilever or Nestle, investment bankers said. McCormick declined to comment. Unilever and Nestle did not respond to requests for comment.

The slower-growing Kraft-oriented business could meanwhile garner interest from another company that wants to build up its clout with grocers like Walmart and Kroger, said Dave Wagner, a portfolio manager at Aptus Capital, which holds Kraft Heinz shares in an exchange-traded fund.

But Wagner said finding buyers in a challenged segment may not be easy. 

Sales across the entire food maker fell 3% in 2024, and the company slashed its forecasts for sales and profit for the rest of this year.

"If you keep the company as it is now or split it, both are going to have some type of black eye," Wagner said. "They probably wouldn’t be tier one acquisition targets."

(Reporting by Jessica DiNapoli and Abigail Summerville in New York, Editing by Lisa Jucca and Matthew Lewis)