A “strategic transaction” proposition put forward by Kraft Heinz in May could well be about to emerge with a business split a tad over the ten-year anniversary of the mega-merger of Kraft Foods and HJ Heinz.
Such a development would surely not be much of a surprise to market watchers following a slew of poor results from Kraft Heinz and perhaps a veiled submission of what might be considered as the failed combination of 2015 – the company’s shares are currently trading at $27.14 in New York compared to circa $88 when that deal was completed on 2 July of that year.
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Berkshire Hathaway, the US investment group led by Warren Buffett, is reportedly weighing up the disposal of its estimated 27% share in the Heinz ketchup maker, while private-equity firm 3G Capital, which joined the billionaire in the 2015 business combination, is long gone having sold its shares in 2023.
Kraft Heinz pledged in May to “unlock shareholder value” as the company assessed strategic options for a business that generated revenue of $26bn last year. CEO Carlos Abrams-Rivera, in the job for only 18 months, may well have been encouraged by the split initiated by Kellogg Company in 2023.
Confectionery giant Ferrero announced a $3.1bn deal for WK Kellogg last week, the North American breakfast cereals business that emerged from that separation. The other portion, Kellanova, is in the throes of a $35.9bn takeover by another sweets heavyweight, Mars.
A valuation of $20bn has been attached to a potential spin-off by Kraft Heinz, according to unnamed sources at The Wall Street Journal, which reported on Friday (11 July) a demerger may feature a ‘large chunk of its grocery business’. Sauces, condiments and spreads such as its namesake ketchup brand and the Grey Poupon Dijon mustard line would remain as Kraft Heinz.
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By GlobalDataIndustry analysts were quick off the blocks to comment on the speculation, no doubt galvanised by the speed in which the Ferrero-WK Kellogg deal came to fruition last week, from speculation through to fact the same day.
The WSJ report, meanwhile, came days after Kraft Heinz announced the sale of a handful of brands in Italy to the recently created NewPrinces for €120m ($140.2m).
“Non–sensical”
Investment bank Stifel, in a report led by Matthew Smith, threw some perspective on what might emerge.
“We believe the potential spin of a part of the grocery business would include the company’s slower growth and highly competitive/commoditised categories, with the remaining entity keeping Kraft’s priority platforms including sauces/condiments and snacking/easy meals.
Smith said the Stifel analysts believe the faster-growing assets to remain would include Kraft Heinz’s North America retail “accelerate” platforms, the company’s global away-from-home unit and its emerging markets businesses. The assets spun off could house the retail portions of the company’s “protect” and “balance” platforms.
Stifel’s analysts quantified the accelerate platforms as including condiments, ready-meals brands Mac & Cheese and Ore-Ida, plus snacking lines such as Lunchables and Delimex.
The assets that could be spun off would include Oscar Mayer meats, Jell-O desserts, drinks brands Capri-Sun and Kool-Aid, cheese with Kraft and Velveeta, plus coffee, as in Maxwell House and Gevalia.
Meanwhile, Peter McDonald, a food-industry consultant and former General Mills executive of 20-plus years, weighed in on the failed merger angle of 2015 in what he described as one of the “darkest chapters in CPG food during my career”.
McDonald explained his thoughts in a LinkedIn post: “The new entity pursued a new-to-the-industry aggressive margin expansion playbook that sent competitors chasing ‘zero-based budgeting’ and other nonsensical corporate initiatives in a desperate attempt to avoid being gobbled up themselves.
“Investors lapped it up and Kraft Heinz hit a maximum enterprise value of $140bn in 2017. Since then, food-industry reality has reasserted itself and the margin extraction from innovation, marketing, talent, and pricing aggression has taken its toll,” he wrote, putting Kraft Heinz’s current enterprise value at $50bn.
And acknowledging the reports of a spin-off are only based on speculation at this point, he added: “Now the company may be broken up into constituent parts not unlike things were when the whole fiasco started”.
Sales pressure
Kraft Heinz’s 2024 reported sales dropped 3% to $25.85bn, with organic growth down 2.1% in what CEO Abrams-Rivera described as “a challenging year with our top-line results coming in below our expectations”.
Net income fell to $2.74bn, from the $2.86bn booked for 2023. The company also reported a 63.2% slump in full-year operating profit to $1.7bn, which was linked to $3.7bn in non-cash impairment losses.
It was a poor performance echoed in the opening quarter of 2025, too. Net sales dropped 6.4% on a reported basis and declined 4.7% in organic terms to just shy of $7bn. In the three months to 29 March, operating income decreased 8.1% to $1.2bn.
Net income stood at $712m versus $801m a year earlier.
Alongside the first-quarter numbers, Kraft Heinz also cut its 2025 outlook across a range of metrics to factor in the potential upward pressure on input-cost inflation from changes in tariffs.
Kellogg demerger
“There can be no assurance that the company’s assessment process will result in any transaction, or any assurance as to its outcome or timing,” Kraft Heinz said in a statement in May as it revealed the strategic transaction proposition.
“The company has not set a timetable for completion of this process and does not intend to make any further announcements regarding the process unless and until it determines that further disclosure is appropriate or necessary.”
Picking up on the WSJ report, TD Cowen analyst Robert Moskow estimated the likely valuation of the part of the Kraft Heinz grocery business spin-off at $14.5bn, short of the $20bn put forward by the publication.
He, too, linked his observations to the Kellogg demerger. “Bankers and board members of the food industry certainly have noticed the value capture of the 2023 Kellogg split up. After accounting for the Mars and Ferrero acquisitions of the two parts, investors will have realised 41% since the spin, while consumer staples stocks (by our math) fell 6% and fundamentals deteriorated due to changes in consumer preferences and external factors like GLP-1s,” Moskow wrote in a research note.
The TD Cowen analyst also speculated a buyer might step in – whether that’s Kraft Heinz’s intention or not – to snap up the offload, naming McCormick as a potential suitor.
“Our sum-of-the-parts analysis indicates 11% upside to KHC’s current enterprise value based on eight times EV/EBITDA for grocery and 10.5x EV/EBITDA for sauces, condiments and spreads,” Moskow suggested.
“However, we could see another 20% upside if a strategic acquirer steps up to buy the sauces and condiments business (about 44% of KHC sales), which will look a lot like the original pre-merger Heinz business of 2013. For example, we see a good strategic fit with McCormick, which has been expanding into the condiments space for several years through tack-on deals, and a high degree of EPS accretion.”
Moskow added to his thesis by explaining that “mega-mergers in food have low success rates and that ‘depth’ tends to beat ‘breadth’”.
He continued: “The skill set and investment requirements to succeed in disparate parts of the grocery store (e.g. refrigerated, frozen, shelf-stable, and snacks) tend to differ.
“We believe that food companies with focused portfolios and category leadership (e.g. Hershey) have a better chance of long-term success than diversified companies trying to leverage operating and marketing capabilities across a wide range of categories.”
Back to 2015
A common theme emanating from food-industry analysts is the throw back to the pre-2015 merger, what AllianceBernstein’s Alexia Howard deemed as a “reversal”.
“When we looked into the relative growth rates of the legacy Heinz company since the companies were merged in 2015, it looks as though the legacy Heinz business has grown retail sales at a 5.3% CAGR over the past decade, while the legacy Kraft brands have grown at only 2%,” Howard wrote in a research note.
“Looking at how the company could break up might mean that the remaining faster-growing company comprises the 25% of companywide sales in international markets plus another 30% of the 75% of the US sales for a total of around 47.5% of companywide sales.”
Howard explained further: “Looking at how the sales could break down, it seems that the faster-growing remaining company could represent around 47.5% of company-wide sales. Clearly, the margins in the international markets are significantly lower than in North America, which could mean that 38.2% of the total company’s adjusted EBITDA of $6.36bn in 2024 potentially sits with the faster-growing remaining company, while the remaining 61.8% sits with the spin-off.”
The Stifel analysts added: “The hypothetical slower growth ‘Spin Co’ would incorporate the retail protect platform featuring a projected low-single digit, ten-year, industry CAGR, high gross margins and low private-label penetration, as well as the retail balance commoditised business platform featuring a flat projected ten-year industry CAGR, low gross margins, and high private-label penetration.
“We view a potential spin of the lower growth and lower-margin retail businesses as a way to unlock value within the higher growth and higher-margin remaining businesses.”
