Goldman Sachs Group Inc has backed Rabbet, a U.S. startup that develops software to help make construction finance more efficient, the companies said on Wednesday.
Kraft Heinz Co. shares fell 20 per cent on a slew of bad news, mainly centering on a multi-billion dollar write-down, which had investors wondering if years of rigorous cost cuts came at the expense of losing the value of its marquee Kraft and Oscar Mayer brands.
The move put the spotlight on Kraft’s slowing growth and the changing tastes of consumers, who have been shunning older, established brands for newer hipper products, cheaper private label brands and non-processed food.
Shares of rivals also fell, with General Mills, Conagra Brands Inc, Unilever and Nestle SA all down between one per cent and four per cent.
Kraft Heinz, controlled by Brazil’s 3G Capital and Warren Buffett’s Berkshire Hathaway Inc., has been combating higher transportation and commodity costs by tightening overall expenses. But that has come at a price.
“Investors for years have asked if 3G’s extreme belt-tightening model ultimately would result in brand equity erosion,” JPMorgan analyst Ken Goldman said.
“We think the answer arguably came yesterday in the form of a US$15 billion intangible asset write-down for the Kraft and Oscar Mayer brands,” said Goldman, who cut his rating to “neutral” from “overweight.”
The company, which competes with General Mills Inc and Kellogg Co, cut its quarterly dividend to 40 cents per share from around 63 cents per share on Thursday.
In addition to lower-than-expected earnings, the company disclosed it had been subpoenaed by the U.S. Securities and Exchange Commission in October, related to an investigation into its accounting policies, procedures and internal controls related to procurement.
The company said it was working on ways to improve its internal controls and determined the problems required it to record a $25 million increase to the cost of products sold.
The shares tanked 20 per cent in late trade and are set to open at a record low at the open.
H.J. Heinz merged with Kraft in 2015 in a deal engineered by 3G, and under its stewardship carried out extreme cost cuts that risked hurting the company’s top line by stifling investment in innovation and marketing.
A year later, 3G was praised for making Kraft Heinz’s operating margin the best amongst its peers, but that came at the cost of closing six factories and cutting 7,000 jobs in 18 months.
Analysts now doubt if 3G’s model was effective, given that the company’s margins before interest and taxes fell to 23.2 per cent in 2018 from 27.2 per cent in 2015.
“Kraft Heinz results confirmed all our worst fears — plus more,” Guggenheim Partners’ analyst Laurent Grandet said in a note.
Stifel downgraded the stock to “hold” from “buy” and more than halved its price target to US$35, well below the current median target of US$52.
Credit Suisse cut its price target by US$9 to US$33, making it the lowest on Wall Street.
“This is not your typical ‘reset the base and everything will be fine’ story,” Credit Suisse analyst Robert Moskow wrote.
“The dividend cut, the US$15.8 billion write-down of the Kraft and Oscar Mayer trademarks, and the guidance for further divestitures demonstrate the hallmarks of a company that has a serious balance sheet problem,” Moskow said.
The write-down indicates declining fortunes of the iconic brands and other losses in asset value, meaning the company views those assets as less valuable than before the merger.
“Kraft Heinz is in a worse position than many other consumer packaged goods companies because it has got a very weak portfolio of brands. They are not delivering the level of growth that’s needed in this sort of market,” GlobalData Retail managing director Neil Saunders said.
© Thomson Reuters 2019
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