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Kraft Heinz Investors Overreacted To 3G Capital Reports

CPB, K, GIS, KHC | February 17, 2017

Shares of Kraft Heinz Co (NASDAQ: KHC) slid on mixed Q4 2016 results and press reports, stating 3G Capital would not use its new fund to support M&A at Kraft Heinz.

These press reports are unconfirmed and, even if correct, would not change much for Kraft Heinz investors, Bernstein’s Alexia Howard said in a report.

Howard maintains an Outperform rating on the company, with a price target of $110.

Kraft And Potential Targets Decline

On Thursday, press reports suggested private equity firm 3G Capital would use its new $10 billion fund to start a new vertical rather than to support Kraft Heinz M&A in packaged food.

Kraft Heinz’s shares declined 4.2 percent, while shares of potential targets were also down. Mondelez International Inc (NASDAQ: MDLZ) plummeted 4.8 percent, General Mills, Inc. (NYSE: GIS) was down 2.6 percent, Kellogg Company (NYSE: K) declined 1.8 percent and Campbell Soup Company (NYSE: CPB) slipped 1.4 percent.

Doesn't Change Much

“KHC doesn't need an equity injection by its sponsors to pursue large scale M&A,” Howard commented. Assuming Kraft Heinz purchases Mondelez at a premium of 25 percent, with 20 percent cash and 80 percent equity, even without infusing any funds, 3G and Berkshire would have 32 percent of the combined entity, “enough to retain major influence.”

While bears may say that this indicates 3G has better options than Kraft Heinz’s shares at current prices, this is an "apples to oranges" comparison, which “misunderstands the very different costs of capital of a KHC shareholder and an LP of a 3G Capital fund,” the analyst pointed out.

The development does not change the fact that the U.S. packaged food segment is highly very fragmented or that Kraft Heinz’s margins are significantly higher than those of its peers or that management is interested in large-scale M&A, Howard noted.