Even billionaire investor Warren Buffett occasionally makes expensive investment mistakes believing that a bigger company like Kraft Heinz (NASDAQ: KHC) would generate more sales and reduce costs.
The breakup of Kraft Heinz into two publicly traded companies next year could unlock more value for investors who have been unhappy with lower earnings and profit margins.
The merger of Kraft and Heinz in 2015 was the brainchild of Buffett, CEO of Berkshire Hathaway (NYSE: BRK), who is the largest shareholder of the food conglomerate. The original $46 billion deal was meant to produce cost savings for both companies and expand sales to other countries. The consolidation has not always been a smooth one for the behemoth that sells packaged foods, sauces, lunch meat and cheeses.
Shares of Kraft Heinz have dropped by a massive 65% since the merger occurred a decade ago. Kraft Heinz now has a $31.9 billion market cap, which is less than its value when the merger occurred a decade ago.
But Buffett, who is well-known for his savvy investment decisions, turned out to be wrong and a larger food company did not generate a higher profit margin or more sales.
Investors have lost money. The past year has been brutal for the stock which has dropped 25.2%. Longer term shareholders have not fared better with a decline of 19.5% during the past five years.
Berkshire Hathaway still holds a 27.5% stake or 325.6 million shares of Kraft Heinz whose value fell to $8.5 billion on September 2.
Kraft’s market capitalization was $36 billion in 2015 before news of the deal was released. Heinz was purchased in 2013 by Berkshire Hathaway and 3G Capital for $23.2 billion and taken private.
Instead of running the food and sauce companies more efficiently, what resulted were major layoffs, declining sales and profit margins, customers choosing healthier foods and products and increasing competition coming from the growing private label businesses embraced by grocers such as Kroger (NYSE: KR), Target (NYSE: TGT) and Walmart (NYSE: WMT).
Over a period of several years, 3G Capital reduced its stake in the food conglomerate. In 2023, 3G Capital divested of its remaining 16.1% stake in the company.
It appears that Buffett should have divested of its shares in Kraft Heinz like 3G Capital who sold shares between 2019 and 2021 and received about $35 a share on average.
Buffett does not believe that breaking up the companies into its original businesses will produce more value.
He does not plan on selling Berkshire’s shares unless a buyer emerges to buy the entire company.
“It certainly didn’t turn out to be a brilliant idea to put them together, but I don’t think taking them apart will fix it,” Buffett told CNBC.
Buffett said he is “disappointed” in the decision of the board, according to CNBC.
Two public companies in 2026
The two companies will spin off into a grocery basics business selling snacks, cheese and lunch meat such as Lunchables, Kraft Singles and Oscar Mayer, while the other one will contain seasonings, sauces and spreads such as the infamous Heinz ketchup, Kraft Mac & Cheese and Philadelphia cream cheese. The split should close by the second half of 2026.
This break up could be too late as some consumers shifted several years ago to eating healthier, fresher foods, are seeking products with fewer processed ingredients or larger amounts of salt and sugar or are purchasing a lower amount of prepared or frozen foods.
Kraft Heinz executives said the move would allow for more focus to be given to the various food products and sauces.
Carlos Abrams-Rivera, the current CEO of Kraft Heinz, will serve as CEO of the “North American Grocery Co.” which produced $10.4 billion in 2024 net sales.
The board plans to appoint a CEO for the other business called “Global Taste Elevation Co.” that generated $15.4 billion in 2024 net sales.
North American Grocery Co. will include coffee brand Maxwell House, drinks company Capri Sun, snacks company Lunchables, potato-based frozen foods Ore-Ida, cheese brand Kraft Singles and lunch meat brand Oscar Meyer. Global Taste Elevation Co. will consist of Heinz, Kraft Mac & Cheese, Philadelphia cream cheese, soy sauce brand Master and food and drink brand ABC.
Comments