Kraft Heinz Plunges After Weak Results Boost Deal Pressure

(Bloomberg) -- Kraft Heinz Co. suffered its worst stock decline in more than two years after posting disappointing sales and profit, boosting speculation that the food giant will need a large acquisition to fuel growth.

The shares tumbled as much as 7 percent in the wake of the results, which reflected a persistent slump in the U.S. packaged-food industry. Though Kraft has a stable of household names -- including Capri Sun, Lunchables, Oscar Mayer and Velveeta -- consumers have shifted to upstart brands and fresh foods. Nuts and cold cuts were particularly weak in the U.S. during the fourth quarter, Kraft Heinz said.

One year after Kraft Heinz was rebuffed in a bid to buy Unilever, the company is now under more intense pressure to find another deal. Chief Executive Officer Bernardo Hees signaled on Friday that a transaction is possible, saying valuations have gotten more attractive in recent months. He declined to name specific targets, and reiterated that the company feels confident about its prospects to increase sales of current brands.

But investors are skeptical. Kraft Heinz has seen about $30 billion in market value wiped out since the Unilever bid was rejected.

“This reinforces that growth is extremely challenged for this company,” said Ken Shea, an analyst at Bloomberg Intelligence. “It’s not surprising given the categories they’re in and how difficult the retail environment is.”

Earnings amounted to 90 cents a share in the fourth quarter, excluding some items. That was 5 cents below analysts’ estimates. Though sales grew for the second straight period -- reversing a string of declines -- they still missed projections. Revenue came in at $6.88 billion last quarter, while analysts had estimated $6.91 billion on average.

The shares fell as low as $67.65, marking their biggest intraday slide since August 2015. They had already been down 6.5 percent this year through the close of trading Thursday.

Hees said the U.S. tax overhaul will help the company in 2018, but its results last year were disappointing. “Our financial performance in 2017 did not reflect our progress or potential,” he said in a statement.

Since the U.S. tax changes passed late last year, the company has made plans to invest some of the savings. That includes using $800 million for capital expenditures, Kraft Heinz said. The company also vowed to put $1.3 billion into retirement benefit plans, and another $300 million toward “strategic investments to build our capabilities, our people skills and our brands.”

Kraft Heinz was created in a 2015 merger orchestrated by 3G Capital and Warren Buffett’s Berkshire Hathaway Inc. Two years earlier, those backers had teamed up to take Heinz private -- with a strategy of slashing costs and ramping up profit margins. That’s been the playbook at the new combined company too.

Staff Reduction

Hees cut more than 7,000 jobs in 20 months after taking over at Heinz. And the job reductions have continued at the combined company. About 2,000 workers left Kraft Heinz during 2017, bringing the workforce to roughly 39,000, the company said in a filing on Friday. At the start of 2016, the company had approximately 42,000 employees.

With the company announcing Thursday that it had eliminated more than $1.7 billion in expenses since the merger, there is growing pressure to find another target to buy. And without a major deal, Kraft Heinz is starting to look like other U.S. packaged food companies struggling with changing consumer tastes.

“It’s becoming more and more like the old Kraft,” Shea said.

To contact the reporter on this story: Craig Giammona in New York at cgiammona@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Jonathan Roeder

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