Kraft Heinz Settles Buffett Dispute

Through a merger that was consummated in 2015, Kraft Foods Group and Heinz Holding Corporation came together to become the food giant they are today. Prior to this merger, Heinz was owned by Warren Buffett’s Berkshire Hathaway, which maintained the brand and solidified its margins, making it the attractive merger target it became.

Synergies or Problems?

The years following the 2015 merger have been turbulent for the company. Mixed fiscal results combined with some difficult macroeconomic pressures have caused shares to shed a significant 45% of their value since mid-2018.

In an effort to “modernize” the portfolio under its new CEO Miguel Patricio, the conglomerate has sold several of the core brands preventing significant margin expansion. Planters Peanuts, which only contributed $1.1B to the brand's 2020 sales, was sold to Hormel Foods for $3.5B in 2021.

Later that year, the groups US and Canada cheese business, Natural Cheese, was sold to Groupe Lactalis for $3.3B in an all-cash deal.

“The sale of our natural cheese portfolio is another milestone in our rapid transformation,” said Kraft Heinz CEO Miguel Patricio. “The divestiture is a great example of our agile portfolio management, and we believe it will help Kraft Heinz enhance our overall growth profile, our strategic focus, and financial flexibility.”

Despite the consolidation, financial results have been mixed. Adjusted EBITDA decreased by 5.8% YoY to $6.0B in 2022, but operating expenses decreased by $720MM. From a geographic perspective, North America remains KH’s largest market representing around 70% of total net sales.

However, from a growth perspective Kraft-Heinz’s international market segment has the most potential, at a projected 12% YoY growth rate.

Gross profit margins have also increased 1.2% YoY thanks to pricing flow-through and unlocked operational efficiencies. Q1 also saw the firm enter net untapped sales channels such as the travel foodservice segment with the firm now supplying airlines with select branded products to be carried aboard regular service flights.

A similar expansion of the Lunchables brand into the National School Lunch Program is estimated to represent a $25B market opportunity for the firm.

Settling Disagreements

Recently, Kraft Heinz reached a settlement agreement in a securities class action lawsuit against the company, with a massive settlement amount of $450 million. The settlement is subject to court approval and is among the largest of such settlements in history.

The lawsuit stemmed from a 2019 announcement by Kraft Heinz regarding a $15.4 billion goodwill charge associated with the devaluation of its Kraft and Oscar Mayer brands. The plaintiff alleged that undisclosed cost cuts imposed by Brazilian private equity firm 3G Capital, which orchestrated the merger, led to a deterioration in brand value and harmed customer relationships.

The securities class action lawsuit consolidated various complaints and accused Kraft Heinz, certain directors and officers, and 3G Capital of violations under Sections 10(b) and 20(a) of securities laws.

The defendants' motions to dismiss were denied, leading to the initiation of discovery. However, the parties engaged in mediation and subsequently negotiated a settlement. The fully executed settlement agreement was filed with the court on May 5, 2023.

The settlement agreement states that the parties have agreed to a cash payment of $450 million, which will be allocated among the Kraft Heinz defendants, 3G Capital, and insurers. The exact contribution from insurers and 3G Capital is not disclosed.

It is worth noting that the settlement amount, while significant, ranks as the 41st largest settlement according to the ISS Securities Class Action Services List of Top 100 Settlements.

The settlement raises questions about the extent of insurers' contributions and the impact on Kraft Heinz and its executives, as related shareholder derivative litigation is still pending. Berkshire Hathaway, led by Warren Buffett, had a significant investment in Kraft Heinz through a partnership with 3G Capital.

Buffett later admitted to overpaying for Kraft Heinz and relying too heavily on 3G Capital's cost-cutting strategies. Despite the setback, Berkshire Hathaway maintains its investment in Kraft Heinz, as the company has made progress in improving operations and reducing debt according to Buffett.