Shares in Kraft Heinz dived 27 per cent on Friday as Wall Street reacted with alarm to a “disastrous” update in which the company took a $US15 billion writedown and disclosed it was the subject of a probe by the Securities and Exchange Commission into its accounting policies in procurement.
About $US16 billion was wiped from the market value of the company behind Philadelphia Cream Cheese, Kraft dinners and Oscar Mayer hot dogs after it disclosed the bad news.
The writedown, combined with the SEC subpoena, intensified concerns about the management style of 3G Capital, which engineered the 2015 merger of Kraft and Heinz and went on to pursue deep cost cuts.
About $US16 billion was wiped from the market value of the Kraft Heinz, the company behind Philadelphia Cream Cheese, Kraft dinners and Oscar Mayer hot dogs after it disclosed the bad news.
Only two years ago the enlarged group had hoped to buy Europe’s Unilever but the planned $US143 billion deal collapsed amid concerns about a culture clash.
The SEC probe prompted the company to launch its own investigation and, as a result, it recorded a $US25 million increase to its “costs of products sold”.
“They didn’t really go into a lot of detail but it doesn’t seem to move the needle – it just looks bad,” said John Baumgartner, analyst at Wells Fargo.
Kraft Heinz took the impairment charge to reflect the more downbeat prospects for the profitability of some of its best-known products.
Shares fell to their lowest level since the group was created and triggered a rout across the wider sector with investors questioning how custodians of other big brands were coping as consumers shunned packaged foods.
Kraft Heinz’s travails reverberated in Europe, knocking as much as 4 per cent from Anheuser-Busch InBev, the world’s biggest brewer, which was also built by 3G.
Heinz shares fell on Friday to their lowest level since the group was created and triggered a rout across the sector with investors questioning how other big brands were coping as consumers shunned packaged foods. AP
Although the two circumstances are not exactly the same, ABI is also struggling to show that it can stoke sales growth after years of relentless focus on expenses and margins.
The troubles at Kraft Heinz and ABI were “calling the whole model into question”, said James Edwardes Jones, analyst at RBC. “Kraft Heinz is to food what Budweiser is to beer: brands that are not very hip or current, and struggling to be relevant.”
Kraft Heinz’s writedown reflected a reduced value of goodwill at its US refrigerated and Canada retail businesses and its Kraft and Oscar Mayer brands.
“The trademarks have a value based on assumptions of future cash flows – but now they are saying their future earnings power is not what they initially expected it to be, so they need to write down the value,” said Mr Baumgartner.
Bond markets also reacted with concern. Kraft Heinz bonds due to mature in 2045 dipped 1.24 cents on the dollar to 83.67 cents, just over 2 cents shy of an all-time low.
The developments had “the hallmarks of a company that has a serious balance sheet problem”, said Robert Moskow, analyst at Credit Suisse, who described the update as “disastrous”.
Kraft Heinz slashed its dividend more than a third and said it was eyeing divestitures in an effort to shore up its balance sheet.
Wall Street raised eyebrows over remarks from Bernardo Hees, chief executive, who signalled that despite the setbacks the company still had its eye on dealmaking.
The dividend cut and disposals would give Kraft Heinz “the balance sheet flexibility for future consolidation — for us to be a consolidator — if the industry goes that way”, he said.
Steven Strycula, at UBS, said: “We do not believe a large-scale deal is in KHC investors’ best interest. Margin gains have proven unsustainable and [earnings] erosion makes debt deleverage challenging.”
Warren Buffett’s Berkshire Hathaway, 3G’s highest-profile backer, was caught up in the sell-off. Shares in Berkshire, Kraft Heinz’s biggest shareholder, were down 1.7 per cent.
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