At Kraft Heinz, A Federal Investigation And A $15.4 Billion Write-Down


The combined company cut $1.7 billion in expenses, beating the target it released when the deal was announced.

Commemorative items for sale are on display at the Kraft Heinz booth during the Berkshire Hathaway Annual Shareholders Meeting at the CenturyLink Center in Omaha, Nebraska, U.S. April 30, 2016.

Kraft disclosed in its quarterly report that it received a subpoena from the Securities and Exchange Commission related to an investigation into its accounting policies.

Changing consumer tastes and shopping habits have decimated sales at the largest food companies in the USA, as shoppers gravitate to more natural and organic options, rather than pre-packaged and sugar-laden products.

The company slashed its dividend by 36 percent Thursday to raise cash for what it anticipates will be consolidation in the industry.

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Meanwhile, the prices of many commodities that food companies use are rising, such as agricultural products and materials like aluminum and pulp for packaging.

Warren Buffett's Berkshire Hathaway is a major shareholder in the company; it owns almost 326 million shares, or a 26.71% stake worth $15.4 billion before Friday's plunge.

The maker of Jell-O, Oscar Mayer hot dogs and Kraft macaroni and cheese may need to switch up its menu.

But the strategy apparently didn't work as planned at Kraft Heinz. "For that, we take full responsibility".

Kraft-Heinz chief executive Bernardo Hees said. Kraft Heinz said that as a result of an investigation with the help of an outside lawyer, it recorded a $25 million "increase to costs of products sold".

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"We see the 3G model as highly dependent on deal-making and synergy realization and at some point having best-in-class margins doesn't matter if the sales growth doesn't eventually come", Guggenheim Partners' analyst Laurent Grandet said in a note.

The packaged-food giant's charge to reduce the goodwill value of the Kraft and Oscar Mayer trademarks and other assets came with disappointing fourth-quarter earnings and an accounting subpoena from securities regulators.

General Mills Inc., Campbell Soup Co., Kellogg Co., and J.M. Smucker Co. hold the same familiar place in the mind of the American consumer.

With the billions in charges, the investigation and a dividend cut, the first of what will likely be a wave of downgrades on the company stock began to roll in Friday.

"It is more than fair to ask if any fundamental value for 3G [Capital] has been created since the Kraft Heinz merger", Goldman wrote.

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Kraft, which owns Velveeta cheese and Heinz ketchup brands, forecast adjusted earnings before interest, tax, depreciation and amortization (EBITDA) between $6.3 billion and $6.5 billion in 2019, lower than analysts' estimates of $7.47 billion, according to IBES data from Refinitiv. "They are not delivering the level of growth that's needed in this sort of market", GlobalData Retail managing director Neil Saunders said.