The group will divide its operations into two separate entities by the end of 2026: the first will bring together the group's international operations around the Heinz brand, with the aim of growing; the second will focus on the North American market and ensure more stable cash flows.
The mastermind behind the operation, 3G Capital, the formidable Brazilian investment company already behind the AB InBev-SAB Miller and Burger King-Tim Hortons mega-mergers, has missed the boat on this one: none of the economies of scale – "synergies" – among the $1.5bn promised at the time of the merger have been realized.
The main financier of the deal, Berkshire Hathaway, also the group's largest shareholder with 27.5% of the capital, expressed its skepticism yesterday through its chairman Warren Buffett about the merits of the proposed separation. In hindsight, the merger was certainly not "a brilliant idea," according to Buffett, who nevertheless indicated that he did not believe that separating its operations would enable the group to overcome its difficulties.
Kraft Heinz has lost two-thirds of its market value since the enthusiasm generated by the merger of the two agri-food giants in 2015. The group has not grown at all over the past decade. Taking inflation into account, its turnover has actually fallen sharply.
This inflation has not spared the cost structure, resulting in lower margins and a 22% decline in operating profit, from $6.8bn to $5.3bn. However, the group has remained a comfortable cash machine: over the last five financial years, its cash profit—or free cash flow—averaged $3.3bn per year.
At its historic lows, Kraft Heinz's valuation represents a multiple of 10x its operating profit and 8x the sum of the adjusted operating profits before investments—or EBITDA—of its two future segments. In aggregate, largely covered by free cash flow, the 6% dividend yield should be maintained once the separation is complete.
