Shares Fall 28 Percent After Kraft Heinz Writes Down $15 Billion

Kraft Heinz has disclosed they are currently under a federal investigation which has caused them to slash the value of the Oscar Mayer and Kraft brands by $15.4 billion.  This is a massive setback for a company that is in the middle of revitalizing its once-stable household name-brand labels.  

Unfortunately, this is setback may be only the beginning. Analysts say a dividend cut and soft outlook on the year resulted in shares plunging 26 percent Friday morning. This was the largest single day decline in history of the company.  And then, by noon, Kraft Heinz had already lost $16 billion of its market value. 

Kraft Heinz said that the United States Securities and Exchange Commission (SEC) investigating the company’s accounting practice, particularly in the division that manages supplier interaction.  Furthermore, the company cites the impairment charge has led to a shocking $12.6 billion loss in the fourth quarter. 

Kraft Heinz CEO Bernardo Vieira Hees explains, “We were overly optimistic on delivering savings that did not materialize by year end. For that, we take full responsibility.”

JPMorgan analyst Ken Goldman, however, is not quite so optimistic.  In fact, the bank has doubt that 3G Capital’s strategy to chase down growth through cost cutting will be effective.  He says, “Investors for years have asked if 3G’s extreme belt-tightening model ultimately would result in brand equity erosion.” 

And with that, we can make more sense of the fact that Kraft Heinz has $31 billion of debt. That is nearly 5 times the value of the company’s earnings before interest, tax, depreciation, and amoritization (EBITDA).  

That in mind, Kraft Heinz says that the subpoena from the SEC investigation has prompted them to conduct an internal review; this is what brought about a $25 million charge for expenses that, unfortunately, should have been previously accounted for.  As such, the company now says they are implementing new policies and procedures to prevent similar mistakes in the future. 

For one, they are taking many steps to step cash flow issues; first of all by cutting its dividend to 40 cents per share, up from 62.5 cents.  That, the company says, should free up more than $1 billion of cash this year.  In addition, Kraft Heinz agreed to sell two of its non-US businesses. These are, essentially, the Indian beverage and Canadian cheese brands, and their sale should bring in another $1.8 billion.