Kraft Heinz to sell part of its cheese business for $ 3.2 billion

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Kraft Heinz Co. KHC 0.31% divests from much of its cheese business, a sign of challenges facing food companies whose scale has complicated operations as the coronavirus pandemic has driven unprecedented demand .

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Kraft Heinz said on Tuesday it had reached a deal to sell its natural cheese business in the United States and a blend of other brands of cheese in North America and abroad to French group Lactalis SA for 3.2 billions of dollars.

The Wall Street Journal first reported that the sale was imminent earlier Tuesday. Ketchup maker Heinz and deli meats Oscar Mayer, among many other foods, said the sale was part of its plan to streamline its business and focus on brands that have the best potential to resonate with contemporary consumers. .

“We have moved away from the consumer,” Nina Barton, Kraft Heinz chief growth officer, said Tuesday in a virtual meeting with investors. “We are rebuilding the connection.”

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Sales of groceries, including packaged foods, increased during the coronavirus pandemic as consumers stocked their pantries and turned to food primarily at home. But some established companies have lost market share even as their sales have increased because they cannot meet unexpected demand. And the sudden need for more cleaning supplies, protective gear, and delivery trucks has squeezed their profit margins.

Kraft Heinz had just started an overhaul of its portfolio of dozens of brands when the pandemic hit. While Kraft Heinz struggled to make enough macaroni and cheese to meet demand, competitors gained ground, such as General Mills Inc. with its Progresso soup and Betty Crocker baking mixes. The pandemic has reinforced a theme evident in Kraft Heinz’s challenges since the company was founded in a 2015 merger: bigger isn’t always better.

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Nestlé SA, Unilever PLC and other major food manufacturers have also made significant divestments in recent years to better target their operations.

Kraft Heinz has struggled since the merger, with consumers turning to foods that look more fashionable or healthier, and to lower-priced store brands. The pressure to revive sales has dampened its ability to improve profitability. This is reflected in a stock that has lost more than half of its value since the early days of the merger, giving it today a market cap of around $ 40 billion, not much more than its leverage close to. of $ 30 billion. A portion of the proceeds from the sale to Lactalis is intended for debt reduction, the company said.

Kraft Heinz said at its investor meeting that it plans to cut costs by $ 2 billion over five years, reverting to the strategy that inspired the creation of the company in the merger five years ago. It starts with gross savings of $ 350 million to $ 400 million this year.

Kraft Heinz shares edged up 0.3% on Tuesday to $ 31.97.

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Lactalis, a France-based global dairy company with a narrow stake, produces brie, ricotta and other cheeses in the United States and sells them under brands such as President.

The company entered the United States about 40 years ago and embarked on a frenzy of expansion, acquiring Stonyfield organic yogurt from Danone SA in 2017 in a transaction valued at $ 875 million.

The addition of the Kraft cheese business would further strengthen the company’s footprint at a time when demand for basic groceries is higher than ever amid the coronavirus pandemic.

The sale will include shredded Kraft cheese and Cracker Barrel brand and US cheese blocks, Breakstone cottage cheese and sour cream, and other assets. Kraft Heinz will keep Philadelphia, Velveeta, Cheez Whiz and Kraft Singles cream cheese in the United States. It will also maintain its macaroni and cheese business around the world.

The brands that Kraft Heinz sells have achieved sales of around $ 1.8 billion in the past year, which represents around 7% of the company’s annual sales.

In 2018, Kraft Heinz agreed to sell its Canadian natural cheese business to Parmalat for more than $ 1 billion.

Sale to Lactalis comes as Kraft Heinz reorganizes its business under six new platforms that it says are more focused on what consumers want, like more convenient meals and snacks, instead of 55 grocery categories different. Executives say the new approach will help the company be more agile and innovate more effectively.

In the years following the merger, Kraft Heinz reduced costs to generate approximately $ 1.7 billion in net savings. Both sales growth and market share suffered.

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This has contributed to the loss of value of many of its biggest brands. Since February 2019, Kraft Heinz has reduced the value of its brands by approximately $ 20 billion.

Kraft Heinz chief executive Miguel Patricio said the company, which is part-owned by Brazilian investment firm 3G Capital, was too focused on cutting costs and made short-sighted decisions under his previous leadership. . “We’re changing that mindset,” he said in an interview.

Last year, Mr. Patricio took over the management of Kraft Heinz after several years as Marketing Director at Anheuser-Busch InBev SA, another company in which the partners of 3G are invested.

Mr Patricio said Kraft Heinz will be more strategic about how it cuts costs and invests more savings in marketing its brands, rather than passing everything on to bottom lines, as the company has said. done in the past.

“Do we need to reduce margins to develop brands? The answer is no, ”he says.

RBC Capital Markets LLC was financial advisor to Kraft Heinz and Paul, Weiss, Rifkind, Wharton & Garrison LLP acted as legal advisor. Perella Weinberg Partners was Lactalis’ financial advisor and Dentons was legal advisor.

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