Kraft Heinz shares fall 28 per cent after writedown, dividend cut

Kraft Heinz Co shares fell to a record low on Friday a day after the food company disclosed a US$ 15 billion writedown on its marquee brands, raising concern that years of rigorous cost cutting have eroded the value of its Kraft cheeses and Oscar Mayer deli meats.

Kraft’s revenue growth has stagnated in the years since it merged with Heinz as consumers shun older, established brands for newer products, cheaper private label brands and non- processed and organic food.

The shares fell as much 28 per cent to a low of US$34.51, wiping US$17 billion off the company’s market value. In mid-afternoon trading, shares were down US$13.10 at US$35.07.

Shares of rivals food makers also fell, with General Mills, Conagra Brands Inc, Unilever and Nestle SA all down between 1 per cent and 3 per cent.

Brazil’s buyout fund 3G Capital and Warren Buffett’s Berkshire Hathaway Inc together own more than 50 per cent of Kraft Heinz. 3G has advocated the company combat higher transportation, commodity costs and sluggish growth by reining in expenses companywide. But that has come at a price.

“Investors for years have asked if 3G’s extreme belttightening model ultimately would result in brand equity erosion,” JPMorgan analyst Ken Goldman said.

“We think the answer arguably came yesterday in the form of a US$15 billion intangible asset writedown for the Kraft and Oscar Mayer brands,” said Goldman, who cut his rating to “neutral” from “overweight.”

On Thursday, Kraft Heinz, whose brands include Jell- O gelatin dessert and Velveeta processed cheese, reported a quarterly loss, said it would cut its dividend 36 per cent and disclosed that the U. S. Securities and Exchange Commission was investigating the company’s accounting policies.

Ketchup- maker Heinz merged with Kraft in 2015 in a deal engineered by 3G. Under 3G’s stewardship, the new company embarked on extreme cost cutting that risked stifling investment in innovation and marketing.

Warren Buffett releases his annual letter to shareholders on Saturday and investors will scour the document for any insight from the billionaire on his Kraft stake and relationship with 3G.

Under 3G, Kraft Heinz embraced zero-based budgeting, a cost-conscious strategy intended to improve operating margins that requires managers to justify all expenses, from pencils to forklifts.

Some analysts are now questioning the effectiveness of 3G’s model, given that the company’s margins before interest and taxes fell to 23.2 per cent in 2018 from 27.2 per cent in 2015, the year Kraft Heinz was formed.

“We see the 3G model as highly dependent on dealmaking and synergy realization and at some point having best-in-class margins doesn’t matter if the sales growth doesn’t eventually come,” Guggenheim Partners’ analyst Laurent Grandet said in a note.

“Kraft Heinz results confirmed all our worst fears – plus more,” Grandet wrote in a note.

Stifel downgraded the stock to “hold” from “buy” and more than halved its price target to US$35, well below the current median target of US$52.

Credit Suisse cut its price target by US$ 9 to US$ 33, making it the lowest on Wall Street.

“This is not your typical “reset the base and everything will be fine” story,” Credit Suisse analyst Robert Moskow wrote.

The news also hit the company’s bond investors. Kraft Heinz’s nearly US$31 billion of bonds were among the most heavily traded paper in the U.S. corporate debt market on Friday morning, according to MarketAxess, and yields on several of their largest bonds shot higher and their prices dropped by a full point or more.