PITTSBURGH — It has been two months since The Kraft Heinz Co., Pittsburgh, attempted unsuccessfully to acquire Unilever P.L.C., London, in a $143 billion transaction. The failed takeover effort has drawn renewed attention toward the far-reaching impact Kraft Heinz’s lead investors are having on the food and beverage industry and has raised questions about what acquisition target will be pursued next.
The Kraft Heinz Co. was created in July 2015 through the merger of Kraft Foods Group, Inc. and H.J. Heinz Co. Heinz had been acquired in 2013 by a group led by Berkshire Hathaway Inc. and 3G Global Food Holdings L.P. As of the July 2015 closing, Berkshire and 3G’s combined ownership of Kraft accounted for 51% of the outstanding common stock of Kraft Heinz.
The Kraft deal cemented the position of 3G as the leading change agent in the food and beverage business, having acquired Anheuser-Busch in 2008 (now Anheuser-Busch InBev), Burger King in 2010 (now Restaurant Brands International, following a 2014 merger with Tim Hortons Inc.), Heinz and then Kraft.
At the Consumer Analyst Group of New York annual conference in late February, Kraft Heinz was not a presenter. Still, even amid the prominent presence of numerous food industry chief executive officers, 3G Capital and Kraft Heinz were described as the “elephant in the room” no one was discussing, said Nicholas S. Fereday, senior analyst, Rabobank, New York. Mr. Fereday noted that while 3G had dominated food industry headlines in the days leading to the CAGNY conference in February, few speakers explicitly discussed Kraft Heinz during the conference.
“Ever since 3G’s Valentine’s Day acquisition of Heinz in 2013 and merger with Kraft in 2015, U.S. food companies have been engaged in a rather complex relationship with this potential suitor,” Mr. Fereday said. “On the one hand, the unwelcome attention has forced these Rubenesque companies to slim down and boost margins by scouring through their own business operations for savings and adopting their own versions of z.b.b. (zero-based budgeting) to become less attractive targets.
“But at the same time, 3G’s advances and the endless Wall Street rumor mill around ‘Who will be next?’ has helped bolster company valuations relative to the S&P, despite poor earnings.”
Mr. Fereday said 3G’s unspoken presence has been a factor for years in CAGNY presentations.
“They’ve had a clear impact,” he said. “When they first acquired Heinz, zero-based budgeting became a big topic at CAGNY. It creeped into everyone’s presentations, and it has been adopted by everyone. Everyone is trying to 3G themselves by aggressively looking at cost structure and boost margins.”
While looking to avoid acquisition by 3G, U.S. food companies may have been alarmed by the 3G decision to seek acquisition of Unilever, Mr. Fereday said. Not only did the Unilever bid suggest interest in an overseas target, but also that the 3G “love affair with food may be coming to an end,” he said. He noted that Unilever’s household and personal health care non-food business accounts for about 60% of the company’s total sales, given all the company has done to divest food brands over the past several years.
“In the same way that Kraft Heinz’s bid of Unilever has forced the Anglo-Dutch company to undertake an urgent strategic review by April, so, too, U.S. food companies might want to consider if they too have mishandled their relationship either by being a little too aloof or too successful at cutting costs, as they calculate 3G’s waning interest on their valuations,” he said.
Whether the passion for cost reduction that has resulted from the emergence of 3G has necessarily been a completely healthy development is a matter of debate among analysts.
“If you read food business 10-Ks, you see that changes in business practices have been taking up more and more of management time, which means less time to focus on the ‘big picture,’” Mr. Fereday said. He said it isn’t only 3G that is causing this phenomenon.
“Other activist shareholders are putting pressure on companies to expand margins,” he said.
The lack of top-line growth across the food industry in recent years may suggest the negative impact of the excessive cost-cutting focus, Mr. Fereday said.
“Proving cause and effect is a challenge,” he said. “If you’re focusing on cost cutting and less on top line, it’s less of a surprise that top line isn’t growing.”
In addition to cost reduction, Mr. Fereday said food companies are clustering in other ways because of the current low-growth environment.
He explained, “There is a belief that at some point you have squeezed out all the cost you can. Then what do you do? It’s interesting how they all are fixated on the snack market.
“They are focusing more and more on that and less on other areas of their business. A lot is changing at the moment. More than one company has said change has accelerated, that the rate of change has changed. Management is juggling lots of balls at once.”
This challenge may be implicit in one significant initiative launched by Kraft since the acquisition by 3G — the January 2017 announcement that the company was launching a joint venture with Oprah Winfrey called Mealtime Stories, looking to make nutritious food more widely available. Mealtime Stories is expected initially to focus on ready-to-eat refrigerated dishes.
Kraft Heinz will develop, manufacture, market and sell the new line in the United States. As part of the joint venture, 10% of profits will be donated to charities aimed at eradicating hunger. More specific information about the brand and products will be revealed later in 2017, Kraft Heinz said.