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M&A Deals

Kraft Heinz sells nuts business to Hormel Foods for $3.35bn

On February 11th 2021, Kraft Heinz agreed to sell its Planters peanuts and snacks business to rival Hormel Foods, owner of Spam, for $3.35bn in an all-cash deal. The transaction, expected to close in the first half of this year, follows Kraft Heinz’s $3.2bn sale of its cheese business to the French dairy company Lactalis in September 2020. Despite turbulent performance since 2019, Kraft Heinz has fared rather well during the pandemic. This divestiture will help build on Kraft Heinz’s broader efforts to alleviate its debt burden. 

Deal overview

Kraft Heinz, backed by Brazilian-US investment group 3G Capital and Warren Buffett’s Berkshire Hathaway, owns a portfolio of over eight $1 bn-plus household brands and has a market capitalisation of $43.3bn (as of February 12th 2021). The company acquired Planters after buying Nabisco Brands in 2000, but also owns brands such as Jell-O and Kool-Aid. Kraft Heinz is heavily exposed to the mature North American market, which comprises about 80% of total sales and 75% EBITDA; 10% of revenues comes from EMEA markets. Hormel Foods is a Minnesota-based food conglomerate, and the owner of Spam processed meat, Jennie-O turkey products, and Skippy peanut butter. The nuts business contributed approximately $1.1bn to Kraft Heinz’s sales, largely driven by U.S. sales, during the 2020 fiscal year (reported at $26.2bn FY2020). The transaction will include most product lines sold under the Planters brand, including single variety nuts and Cheez Balls, along with the Corn Nuts brand. Hormel will additionally receive the global intellectual property rights to both the Planters and Corn Nuts brands (subject to existing third-party licenses in other countries), and their respective production facilities. Shares of Kraft Heinz rose more than 1% in premarket trading after the company’s fourth-quarter earnings and revenue beat estimates. Hormel’s stock was flat, however. 

Deal rationale

Despite a recent pandemic-induced boost, as consumers have turned to comfort foods and familiar brands during the lockdown, Kraft Heinz has generally struggled to keep up with the latest consumer trends. Kraft Heinz’s organic growth was down by 1% in 2017, up by 0.8% in 2018, and down by 1.7% in 2019. By streamlining its portfolio, Kraft Heinz can strengthen its brand reputation and presence in markets with popularity by focussing on the children’s brand Lunchables and P3 protein packs. The company is expected to use part of this transaction’s proceeds to expand its three key priority areas; flavours, quick and easy meals, and snacking. Selling its nuts business also reduces Kraft Heinz’s exposure to fluctuating commodity prices. Moreover, the deal’s implied EV/EBITDA multiple is 15 times, making the deal rather attractive given that Kraft Heinz itself trades at 10 times. Although, Hormel’s CFO Jim Sheehan notes that the adjusted purchase price of $2.79bn, which takes into account a tax benefit worth $560m, implying a 2020 EBITDA multiple of 12.5 times. 

Importantly, this transaction will free up extra cash for Kraft Heinz to pay down huge amounts of debt and reduce its net leverage. Kraft Heinz’s credit rating was notably downgraded by Fitch and S&P Global to junk (BB+) in February 2020, sending $21bn worth of bonds into the high-yield market (the seventh-largest downgrade on record). Kraft’s net leverage by the end of 2020 was 3.7 times net debt/EBITDA (assuming EBITDA of $6.7bn, total debt of $28bn and cash balances of $3.4bn). The company predicts that net leverage could decline to 3.5 times following the completion of both this sale and the sale of its natural cheese business. For Hormel, CEO Jim Snee stated that the acquisition “significantly expands our presence in the growing snacking space”, enabling the company to diversify its portfolio beyond meat products. Following the transaction, Hormel’s snacking business will comprise 25% of its overall portfolio. The Planters acquisition is the largest deal to date for Hormel, who acquired the global peanut butter brand Skippy from Unilever for $700m in 2013, and bought Sadler’s Smokehouse for $270m last year. CEO Snee expects the Planters deal to be accretive to earnings by 17 cents to 20 cents in 2022. Management also expects the transaction to generate supply chain and sales synergies of up to $60m by 2024. 

The future of Kraft Heinz 

Kraft Heinz’s reliance on packaged food products and exposure to an already mature North American market leaves its prospects for strong organic growth post-pandemic somewhat slim. Furthermore, most of the cash from recent divestitures ought to be spent on paying down its levels of debt rather than investing heavily in acquisitions in pursuit of inorganic growth. Fitch has revised its outlook on the Long-Term Issuer Default Ratings of Kraft Heinz to positive from stable this month, suggesting that the company is on the right track to paying down its debt and strengthening its balance sheet. It would therefore not be surprising if the company continues to make a few more key divestments over the next couple of years. 

Kraft Heinz’s decision to streamline its portfolio and focus its product innovation and marketing strategy across six main product lines is welcomed by shareholders. However, to see more impressive levels of top-line organic growth over the next few years, the company must rejuvenate its brand by drawing on the use of food influencers, as well as establishing strategic partnerships with food outlets in North American and European markets. Simultaneously, Kraft Heinz must aggressively enter emerging markets such as China, Brazil, India, and Russia, where there’s more growth opportunity. Although, the execution of these strategies will depend greatly on whether Kraft Heinz understands its core audiences and the trends that its target markets care most about. The local taste preferences of those in emerging markets will, of course, differ from those in Kraft Heinz’s mature markets. In the longer term, Kraft Heinz should consider building a healthy-inspired, organic, and eco-friendly range to meet the demands of increasingly eco- and health-conscious consumers. A major threat to Kraft Heinz’s survival, and the longevity of traditional food conglomerates more broadly, is the rise of smaller food startups with purpose-driven brands, centred around healthier and ethical food options. As Forbes contributor Cardello puts it, “increasingly, supermarket shoppers are shunning the middle-aisle… where pickles and Velveeta live and are gravitating to the fresher, more exciting upstarts on the outskirts.” Having said that, Kraft Heinz is currently in the process of transforming its data and analytics capabilities by developing a data hub built on Snowflake’s data cloud architecture. This move suggests that Kraft Heinz is on its way towards better understanding consumer preferences and building a global food consumer brand tailored for the twenty-first century.  

Sources

https://www.ft.com/content/2bc12c58-550f-4615-94d3-f472b4fba608

https://www.chicagotribune.com/business/ct-biz-kraft-heinz-sells-planters-to-hormel-20210211-welijpp4kbbuvoa37d2esmwp5m-story.html

https://www.ft.com/content/6e4956d5-837f-4556-a975-83359f5065b8

https://www.cnbc.com/2021/02/11/kraft-heinz-sells-nuts-business-including-planters-to-hormel-for-3point35-billion.html

https://www.just-food.com/comment/hormel-goes-nuts-for-new-asset-planters_id145207.aspx

https://www.forbes.com/sites/patrickmoorhead/2021/02/01/kraft-heinz-company-delivers-a-taste-of-the-future-with-a-transformational-data-hub/

https://www.forbes.com/sites/hankcardello/2019/03/29/why-big-food-companies-like-kraft-heinz-arent-cutting-the-mustard/?sh=70b8d728710e

https://www.barrons.com/articles/kraft-heinz-downgrades-will-send-21-billion-of-bonds-into-the-high-yield-market-51582052289

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