The recent earnings estimates crash of Kraft Heinz is an indication that yet another failure of the management strategies of private equity/hedge fund control of public companies can now be chalked up.
This time, 3G Capital had determined that the best strategy for Kraft Heinz was to engage in a radical cost-cutting strategy, beginning back in 2017. That all came to a head last week when the company announced that it had not only missed its earnings estimates but had also slashed its dividend and had taken a $15 billion write-down on the value of some of its most famous brands, namely the Kraft and Oscar Meyer trademarks. Talk about dismantling a company! It’s also estimated that the adjusted earnings before interest, tax depreciation and amortization next year is no higher than Heinz and Kraft’s combined Ebitda in 2014 – indicating that there was no value in the Kraft-Heinz merger. Other food companies, however, long hounded by the Kraft Heinz enterprise (there was a botched bid for Unilever in 2017 that triggered much of the present-day unease in the food industry), are relieved that Kraft Heinz (K-H) has finally met its comeuppance. As a result of the pressure of K-H and other hedge fund efforts, Unilever and Danone promised to take a combined $8 billion in costs our of their businesses; and Nestle, who was beset by Third Point activist Daniel Loeb, succumbed to pressure and set an operating margin target. It is prophesied that, as a result of the K-H debacle, activist investors will now have a tougher time muscling into companies and causing their damage with untoward management strategies and will actually have to bring some good ideas to the table – consumer companies were the third-most targeted by hedge funds/private equity of all sectors in 2018. For food companies in the foreseeable future, there is an identified need for spending on innovation to keep up with rapidly changing consumer tastes, as well as investments in marketing. And, to date, hedge fund owners have been distinctly reticent about engaging in either of these practices. Conagra, a company that has avoided the kiss-of-death of hedge fund ownership, has been able to demonstrate the importance of investing in and nurturing its brands, even successfully turning around it aging frozen-food brands Healthy Choice and Marie Callendar’s by discovering the fashionable ingredients preferred by today’s customers and incorporating them in these products. Kraft Heinz seems not to have been alerted to the handwriting on the wall, however. The WSJ reports that in a recent conference call the company’s CEO and 3G partner referred to the company’s dividend cut as simply part of an effort to strengthen the balance sheet for future acquisitions. The Journal described that notion as “fanciful” and acknowledged that food companies around the world have “new ammunition to argue that a merger with Kraft Heinz would only destroy value.” Let’s hope that that ammunition will be put to good use in an effort to bag K-H and its advancements on the food industry.
ALL THE MOVING PARTS – it’s not one element of a company, alone, whose change will bring the best results, but, rather, all of the five elements moving in harmony toward the company’s goals.