Kraft Heinz (NASDAQ: KHC) burned a lot of investors as its stock lost nearly half its value over the past 12 months. The packaged foods giant was already struggling with waning sales and contracting margins, but it dealt investors three devastating blows this February: It took a $15 billion writedown on its Kraft and Oscar Meyer brands, slashed its dividend, and disclosed an SEC probe into its accounting practices.
Yet bottom-fishing investors might still see some glimmers of hope on the horizon. After all, Kraft Heinz trades at just 11 times forward earnings with a forward yield of 5%, and it finally addressed its accounting issues with a long-delayed 10-K filing last month. Its new CEO, Miguel Patricio, could also take drastic measures to get the company back on track.
Image source: Getty Images.
When Patricio took the helm last month, many investors expected him to divest Kraft Heinz's weaker brands to reduce its debt and make room for higher-growth brands. Four big brands were reportedly already on the chopping block: Breakstone's sour cream and cottage cheese, Plasmon baby food, Maxwell House coffee, and Ore-Ida frozen potato products.
However, CNBC recently claimed that Kraft is no longer shopping around Breakstone's and Plasmon due to "tepid buyer interest," and that the Ore-Ida sale is now "on the back burner." CNBC's anonymous sources claimed that Kraft Heinz was still trying to sell Maxwell House, but has faced "pushback" so far. Simply put, no one seems to want Kraft Heinz's dying brands -- and investors shouldn't be too surprised.
How much cash could Kraft have raised?
Kraft Heinz hasn't said much about those potential divestments. However, analysts estimated Breakstone's could fetch up to $400 million, Plasmon could be worth nearly $800 million, Ore-Ida could fetch up to $2 billion, and Maxwell House could be worth over $3 billion.
This means that Kraft could potentially raise over $6 billion in cash by selling those brands. That would certainly help reduce its long-term debt, which rose 9% to $30.8 billion last year. $10.3 billion of that total, excluding capital leases, matures within the next five years -- an alarming figure for a company that had just $1.1 billion in cash and equivalents at the end of 2018. This indicates that Kraft could slash its dividend again within the next few years to meet its debt obligations.
Kraft's massive debt could also limit Patricio's ability to turn the company around. Patricio, who previously served as Anheuser-Busch InBev's (NYSE: BUD) chief marketing officer, revived the beverage giant's ailing Chinese business with fresh marketing tactics, the expansion of local brands, and the premiumization of its flagship Budweiser brand. If Kraft tightens its spending to contain its debt, Patricio's team could struggle to launch aggressive marketing campaigns to revive the company's core brands.
Image source: Getty Images.
Why aren't buyers biting?
Plasmon probably isn't attracting any bids because demand for baby food is tumbling in developed markets as birth rates decline. Consumer tastes in coffee are also shifting, with freshly brewed coffee and pod-based products like Nestle's (NASDAQOTH: NSRGY) reducing demand for aging brands like Maxwell House.
Demand for dairy brands like Breakstone's is waning as consumers shift toward healthier alternatives like oat, soy, and almond-based products, and Ore-Ida is losing customers as consumers shun fried and processed foods. Simply put, there's no reason for companies to buy these brands as consumer tastes change drastically.
Is Kraft Heinz running out of options?
Kraft Heinz's core problem is that it focused on cutting costs instead of weeding out its weaker brands, buying higher-growth brands, and launching effective marketing campaigns. It slashed its prices to boost its organic sales, but that desperate strategy caused its margins to contract -- and it's unclear how Patricio plans to reverse that trend:
Adjusted EBITDA margin
Source: Kraft Heinz quarterly reports.
Patricio hasn't revealed much about his plans to fix Kraft Heinz, but he recently told The Wall Street Journal that it wasn't in a rush to sell brands or make quick acquisitions. Instead, he wants the company to cut expenses in certain areas to free up cash to launch fresh marketing campaigns for evergreen brands like Heinz.
Patricio didn't clarify where those cuts would come from, and his statement directly contradicted the reports of Kraft Heinz trying to sell its brands. Therefore it's unclear if Kraft Heinz took those brands off the block due to a lack of interest, or if Patricio halted the talks to review the brands.
Regardless of the reasons, Kraft Heinz is still treading water, as it's weighed down by a portfolio of soggy brands. If divestments and acquisitions are both off the table, investors should seriously question how Kraft Heinz plans to grow again.
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