Kraft Heinz: the next meal ticket --> https://ig.ft.com/kraft-heinz-merger/
Lex analysis of the tasty options left on the Buffett-3G table
The financial engineers who run Kraft Heinz value returns on acquisitions through a “risk-adjusted” lens. The bigger the reward, the more the American food group and its backers, 3G Capital and Warren Buffett, are willing to venture out on a limb. Likely paybacks vary widely from target to target.
A Lex analysis shows the group’s swashbuckling, if futile, pursuit of Unilever made sense. Kraft Heinz, with an enterprise value of nearly $150bn, would have got a bang for its buck with the similarly-sized, Anglo-Dutch group. A tie-up could have boosted earnings per share by perhaps as much as a fifth (at least before the recent rally in Unilever shares). More modest businesses may now be more receptive to the overtures of Kraft Heinz. But rewards will be commensurately humble.
The deep pockets of the company’s Brazilian and Nebraskan patrons get disproportionate attention. However, Kraft Heinz stock itself represents formidable firepower. The forward P/E ratio based on 2018 estimated earnings is 22 times, a premium to most potential targets. Issuing shares then comes out to a rough cost of capital of less than 5 per cent, probably less than the company’s cost of debt. The group has said it wishes to keep its investment grade credit rating. With such a high valuation multiple, using its stock as big chunk of its M&A currency is a plausible choice.
Snack company Mondelez, once part of Kraft, is thought to be one object of Kraft Heinz’s affections. Assuming it pays a 25 per cent premium, offer a quarter of the price in its own shares and knocks off a quarter of Mondelez’s overheads, Kraft Heinz’s earning per share could jump by a tenth. In this, as in other deals, cost cuts should cover the premium.
Two other rumoured targets, Colgate-Palmolive and Clorox, happen to trade at higher respective multiples than Kraft Heinz. Each also represents a way to diversify into personal care and household goods.
For the reputedly number-focused Kraft Heinz, risk then is not just about deal tactics and valuation but also strategic direction.