"The cost cutting mentality returns to bite them," said Ken Shea, an analyst at Bloomberg Intelligence. "They have to take their home to the class."
When Kraft Heinz was created, analysts wondered where development would come with a pack of aging brands, which also includes Jell-O and Kool-Aid. Changing consumer and market preferences has led to declining sales to the largest food companies in the US as buyers attract more natural and organic products than pre-packaged and confectionery products. But that should not have been important to Kraft.
3G, supported by Buffett's Berkshire Hathaway Inc., has generated industry's profit margins after Heinz's take-over in 2013 and a reduction in costs. That was the plan at Kraft, and it worked for almost two years. The combined company cuts $ 1.7 billion in spending, winning the goal it released when the deal was announced. And investors shouted, with shares rising to the north of $ 90 a share to exchange a big price with their peers.
But after Kraft Heinz cut the fat, the administration needed another deal to start again to improve profit margins. Two years ago, the company made the enormous offer for Unilever and when news leaked about the proposal, Kraft Heinz's shares closed at high levels. Since Unilever has rejected the proposal, however, Buffett-backed company has consistently retreated.
Kraft Heinz's inability to carry out a major takeover under Managing Director Bernardo Hees emphasized his failure to boost sales. Writing announced late Thursday, essentially an expense for lowering the goodwill of its larger brands, was more proof that the company did not do well with its trademarks, Shea said.
Charges resulted in a net loss of $ 12.6 billion or $ 10.34 per share. The company also lowered the dividend and noted to investors a summons received last year from the US Securities and Exchange Commission regarding its procurement practices. Kraft Heinz said that, as a result of an outside lawyer's investigation, it saw an increase of US $ 25 million in the cost of the products sold.
At the back of these bad news, the pressure will be even greater to make a deal. Over the years, speculation about potential targets has been centered on food co-workers such as Mondelez International Inc., General Mills Inc., Campbell Soup Co. and Kellogg Co. There are also rumors that could look out of the food business to diversify their portfolio and grow in growing markets by acquiring a consumer products company.
Hees reported "industry unification" for a profit call on Thursday, saying Kraft Heinz is trying to boost its balance sheet, probably to be able to reach an agreement. Kraft Heinz said it would return to profit growth in 2020 and its strong profit margins give "balance sheet flexibility for future consolidation."
If Buffett's bank remains open, Kraft Heinz may still be able to get a transformation deal. But with its shares falling low in record and big questions about the strategy, getting a big acquisition – something that was already difficult – may be even harder than here.
Berkshire Hathaway's investment fell from a valuation of about $ 15.7 billion to less than $ 11.4 billion, as the stock dropped to $ 34.95 at New York's closing.
"Kraft Heinz must be an ontologist and was unable to do it," said Scott Mushkin, senior analyst at Wolfe Research, in an interview with Bloomberg TV. "You are in an industry that has very important structural open moves and one of the things you can do to try and compensate that it is to put together some of these companies."
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