In his note – sent out after Heinz filed a mixed securities shelf registration for an indeterminate amount [a public offering where a company can offer multiple types of securities that do not have to be issued immediately] – Zuanic said: “Speculation is rampant that the company could be on the prowl again before the year-end."
General Mills and Mondelez International have both been cited as potential targets, although rumors that Kellogg might be top of the list appeared to be quashed last month after sources close to the company told CNBC that a deal was "not likely" in the near term.
A deal to acquire Mondelez for $90bn, funded 50/50 with cash and stock, would be 28% accretive to the value of Kraft Heinz’s stock, said Zuanic, providing a hypothetical example.
An even bigger incentive to close a deal sooner rather than later
He added: “As we have argued in recent notes, synergies are running below pace (the incremental $75m of the second quarter of 2016 would mean $750m by Q4, 2017, half the guidance of $1.5bn), revenue management ran dry in Q2, 2016…. and the valuation is not attractive even factoring our projections.
“However, a hypothetical bid for, say, Mondelez International (28% accretive as per our math, with a $90bn deal funded half equity and half cash) would add about $28 to our just on fundamentals valuation of $100, bringing the stock to $128.
“If we are right about synergies and revenue management running below internal targets, then Kraft Heinz may have an even bigger incentive to close on a deal sooner rather than later.”
Heinz was acquired by private equity firms 3G and Berkshire Hathaway in June 2013, and tied the knot with Kraft Foods Group in summer 2015. Brands in the combined portfolio include Heinz brands: Heinz Ketchup, Classico, Ore-Ida, TGI Friday’s, Weight Watchers, Heinz Beanz, and Smart Ones; plus Kraft brands: Kraft, Velveeta, Jell-O, Oscar Mayer, Philadelphia, Cool Whip, Kool-Aid, Capri-Sun, MiO, Planter’s, and Lunchables.
Pictured left: Kraft Heinz's new 'DEVOUR' frozen entree brand, which promises "craveable" meals for "people who love great food that isn’t overly complicated."
200 jobs going in the US and Canada
His comments came as Kraft Heinz senior VP, corporate and government affairs, Michael Mullen, confirmed the company is axing an additional 200 jobs in the US and Canada on top of the 2,500 announced last year as part of a cost-cutting drive instituted following the 2015 merger of Kraft Foods Group and HJ Heinz.
The move followed the completion of two key integration projects: the merging of two legacy IT systems and the consolidation of the US business unit structure, explained Mullen, who said Kraft Heinz was not commenting on Zuanic's note to investors.
“As a result, we are now operating more efficiently and effectively, which allows us to reinvest in our brands and business... Following a careful and thorough review of our business needs, both now and in the future, the company made the very difficult but necessary decision to eliminate approximately 200 positions across the US and Canada."
Bernardo Hees: We’re doing good, but not great… Consumption trends are working against us
So how is Kraft Heinz doing?
Speaking to analysts during the company’s second quarter earnings call on August 4, CEO Bernardo Hees acknowledged that top line growth had proved elusive in many parts of the business although margins and profitability had improved (due to lower commodity costs as well as efficiency gains).
He added: “On our last call I said that we're off to a good start. Good. Not great. And I think that's how I should describe the first half of the year as well… Our biggest challenge remains the fact that you continue to have a number of categories where consumption trends are working against us.
“As an industry we are in an environment where retail competition is intensified in our biggest and most mature markets, including the US, Canada, the UK, Continental Europe and Australia. Nowhere this is more true than the UK, where key category declines have been at significant drag in the first half even though our market share trends have been improving.”
"On our last call I said that we're off to a good start. Good. Not great. And I think that's how I should describe the first half of the year as well… Our biggest challenge remains the fact that you continue to have a number of categories where consumption trends are working against us."
Heinz CEO Bernardo Hees, Q2 earnings call, August 4, 2016
We launched a new [frozen meals] brand called Devour
Heinz sauces grew at mid-single digits, and sales of Philadelphia Cream Cheese, ready-to-eat refrigerated desserts, and Lunchables, all grew in the mid- to high-single digits in Q2, while new product initiatives for 2016 were “working well, particularly the renovation of Kraft Mac & Cheese and Capri Sun ready-to-drink organic beverage, the introduction of Heinz Barbecue Sauces, and the introduction of Cracker Barrel Mac & Cheese,” said Hees.
“We also launched a new [frozen meals] brand called Devour… about two months ago… and we're very excited about providing a big marketing support to launching that new brand.”
However, these gains were “more than offset by weak consumption trends in categories like roast and ground coffee, frozen nutritional meals and hot dogs.”
Trade spending: We’re not throwing money into deals to try and get quick sales
Asked why the ROI on trade spending seemed to have diminished over the past five years, COO Georges El-Zoghbi said: “The difference between now and five years ago is that consumers' attitude towards brands and category has changed significantly and the availability of merchandising has reduced.”
And while the current challenging environment is “nothing new,” he observed, “it accelerated a little bit over the past 12 months or so, so we're increasing our investment and supporting our big brands. This is the best way to deal with the consumer. The one thing we're not doing is throwing money [into promotions] to try to get quick sales.”
Q2 results: Revenues down, profits up
Second quarter revenues dipped 4.7% to $6.8bn mainly due to currency impacts and divestitures, he said, with organic net sales decreasing 0.5% over the same period. Adjusted EBITDA increased 17.7% versus the year-ago period to $2.1bn.
Pricing was higher despite deflation in key commodities in the US and Canada [mainly dairy and coffee].
However, volumes were down, “primarily due to lower shipments in several categories, particularly meats and foodservice in the US, that was partially offset by growth from innovation in Lunchables and P3 [P3 Portable Protein Packs are packs of meat, cheese and nuts] in the United States as well as gains in condiments and sauces globally,” he added.
In the US, Q2 net sales were down 1.9%, while they dipped 3.9% in Canada, 6.9% in Europe and 16.7% in the rest of the world.