Kraft Heinz after the Merger: Analyzing the Combined 3Q15 Results
About the merger
Kraft Foods was acquired by the Pittsburgh-based, privately owned H.J. Heinz Holding Corporation in October 2014. The company changed its name to Kraft Heinz (KHC) after the merger. It became the third-largest food and beverage company in North America. It’s the fifth-largest food and beverage company in the world. 3G Capital, a Brazilian private equity firm, completed the merger deal along with Warren Buffett’s Berkshire Hathaway. Together, they invested $10 billion in the deal. This made Kraft Heinz worth ~$46 billion.
Cost cutting after the merger
Since Berkshire Hathaway acquired the company, Kraft Heinz expected to implement cost-cutting strategies sooner or later. After the merger, the company cut about 2,500 jobs to implement its plan of saving $1.5 billion in annual costs by 2017. The company faced sales challenges due to changing consumer tastes.
Bernardo Hees, Kraft Heinz’s CEO, said that “The job cuts are not surprising, given the reputation of the company’s management on Wall Street.” Hees also stated that he oversaw cost cutting at Heinz, representing 20% of the workforce, since it was taken over in 2013 in a prior partnership between 3G and Berkshire.
3G Capital implements tight cost controls. This means that the cuts announced on August 12 mainly affected people on the Kraft side of the business. According to company spokesman Michael Mullen, the job cuts were part of the company’s process of integrating the two businesses and designing the new organization. The company expects that this new structure will eliminate duplication to enable faster decision making, increased accountability, and accelerated growth.
The company’s competitors in the industry include Pilgrim’s Pride (PPC), McCormick & Company (MKC), and Keurig Green Mountain (GMCR). They reported operating margins of 10.9%, 13.1%, and 16.6%, respectively, in their last quarter. The First Trust NASDAQ-100 Ex-Technology Sector Index SM Fund (QQEW) invests 0.91% of its portfolio in Keurig Green Mountain.
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