The SEC isn’t messing around when it comes to investor protection. We’re getting used to subpoenas being dealt out in the cryptocurrency space. But when it comes to traditional industries, they pack a decent punch. One right hook so hard, in fact, that it saw Kraft Heinz stock plummet by 20%. And Warren Buffett’s Berkshire Hathaway take a $2.8 billion hit.
Kraft Heinz Was Having a Really Bad Day
There are bad days. Then there are really, really bad days. Just plain awful ones that you wish would sink into the depths of history forever. Kraft Heinz was having one of the third kind on Thursday.
Not only did the company cut its dividend by more than a third, but it took a $15.4 billion impairment charge–and revealed that it had received a subpoena from the SEC over its accounting practices.
Bad News Comes in Threes
They say that bad news comes in threes. Well, it was certainly a triple whammy yesterday for the Kraft Heinz team. The Chicago-based food giant’s shares dropped by a massive 20% in after-hours trading, at just over above $38 each per share.
This write-down by the company caused Kraft Heinz to lose a staggering $12.6 billion in Q4 2018.
A Drastic Change in Policy
On the back of the news, the company’s youngest CFO in history David Knopf announced that Kraft Heinz would be making some ‘changes’ in policy in a bid to remain relevant in a rapidly evolving market.
Knopf alerted Wall Street to the fact that the company would even consider selling some of its assets:
With no clear path to competitive advantage
The company Kraft Heinz was formed in 2015 by a merger backed by investment firm 3G Capital and Warren Buffett’s Berkshire Hathaway.
It’s long been questioned whether the outdated products the company sells can compete in an age that’s learned to be more health conscious. After all, with more millennials paying more attention to their diet, Mac ‘n’ Cheese in a box and hot dogs just don’t seem as appealing.
And with a long-term debt burden of over $30 billion for the year, it will have to make some serious adjustments.
Knopf further stated that the write-down was due to lower than expected profit margins in the second half of the year due to ‘supply chain issues’. But to many, that seems about as plausible as QuadrigaCX losing access to its cold storage wallets.
Knopf also made a reference to higher discount rates as well as higher interest rates which had reduced the value of future cash flows.
Chief analyst at JPMorgan Kenneth Goldman was quick to pour scorn over Kraft Heinz’ unlikely explanation, implying that the food company’s woes were more serious than a rising discount on its food prices and a lower than expected performance. He said:
Companies don’t generally take writedowns because recent performance was bad and because discount rates have risen.
3G Capital Known for Its Cost-Cutting
3G Capital has long had a reputation for belt-tightening when it invests in companies. And the writedown leads many analysts to question whether its well-known cost-cutting tactics are hurting the company’s brands.
Kraft Heinz received the SEC subpoena in October for questionable ‘accounting policies’ and ‘internal controls’. This caused them to launch an internal investigation adding some $25 million to its costs.
The food giant whose brands range from Heinz Ketchup to Oscar Mayer hotdogs, also announced that it was reducing dividends of its shares to $1.60 per year (down from $2.50).
Mergers Not Made in Heaven
Mergers rarely have a successful outcome. Just cast your mind back to the failed AOL Time Warner merger that cost some $350 billion if you want confirmation of that. And it seems that not all has been well at Kraft Heinz since it merged in 2015.
Even before its black Thursday, shares had already been steadily falling. However, despite the dismal picture, the company reassured that it was in the process of:
Implementing certain improvements to its internal controls to mitigate the likelihood of this occurring in the future and has taken other remedial measures.
They are also fully cooperating with the SEC.
Despite the net loss, net sales were barely changed from the last three months of 2017, at $6.89 billion.
Chief Executive Bernardo Hees told Wall Street that while the company was disappointed, they were still hopeful for the future. The dividend cut and divestitures are meant to give the company the balance sheet flexibility needed to enable future deal-making.
We still believe strongly that our model is working and has a lot of potential for the future.
One only has to question whether Warren Buffett remains so hopeful. Losing $2.8 billion in one hit has to hurt pretty bad.
Last modified: September 23, 2020 12:27 PM