CorpRaider Posted March 25, 2015 Posted March 25, 2015 I've looked at Kraft 4-5 times over the past couple of years and passed, but I wasn't able to factor coming in and gutting the sucker and then levering up the earnings yield. I also feel like GIS might eat their lunch with the Annie's brand, if they keep the organic bona fides in place.
valueyoda Posted March 25, 2015 Posted March 25, 2015 It would be great if 3G would acquire Pepsi soon through Anheuser-Imbev with the help of Berkshire, while selling the Frit-o-Lay division to Kraft-Heinz.
petec Posted March 25, 2015 Posted March 25, 2015 Behring, Buffett, Lehmann, Telles, Abel, Britt Cool...that's a serious board of directors, and that's only the BRK/3G side! And quite an achievement for a 30-year-old! http://www.bloomberg.com/bw/articles/2014-01-23/meet-warren-buffetts-top-troubleshooter-tracy-britt-cool
gfp Posted March 25, 2015 Posted March 25, 2015 Berkshire will end up with $9.5 Billion cost basis on 320 million KRFT shares after (not receiving) the 16.5 dividend. Looks like that stock will be worth over $20 billion and pay a decent dividend. No mention of the preferred, but I bet it's still there earning him 9%. Interesting deal! He said it came about in 4 weeks.
tede02 Posted March 25, 2015 Posted March 25, 2015 Berkshire will end up with $9.5 Billion cost basis on 320 million KRFT shares after (not receiving) the 16.5 dividend. Looks like that stock will be worth over $20 billion and pay a decent dividend. No mention of the preferred, but I bet it's still there earning him 9%. Interesting deal! He said it came about in 4 weeks. I was looking at this too and listening to what Buffett said on CNBC this morning. It basically looks like a double, DAY 1! That certainly seems like a hell of a deal for Berkshire.
original mungerville Posted March 25, 2015 Posted March 25, 2015 Looks like a fair deal, curious to see financing details. As kraft shareholder you get a 25% dividend + 49% of a company with mcap probably around 60 mn (assuming no net debt change + 10x EBITDA)? So 10 mn + 30 mn = 40 mn, + 3G & Buffett as long term partners. Not too shabby This seems like a good way to look at it. Can you elaborate a bit on this. (I am trying to figure out if buying Kraft at $80 or so at this point makes any sense or not. My nose at this point tells me it may be, however, I still have to get my head around the valuation relative to earnings power of the combined company).
original mungerville Posted March 25, 2015 Posted March 25, 2015 I see two big value generators for the combined company: 1. The cost cutting that 3G will do - I here that is around $1.5 billion per year in savings. 2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. (There may also be some domestic benefit to Kraft brands as the Heinz brand is probably more of a "must have" brand, and therefore Kraft sales may get a bit of a bump domestically via greater leverage with grocers, etc). I am looking to put together the valuation relative to owner earnings of the combined company focusing on #1 only at this point. What is the starting multiple. Any views?
original mungerville Posted March 25, 2015 Posted March 25, 2015 I've looked at Kraft 4-5 times over the past couple of years and passed, but I wasn't able to factor coming in and gutting the sucker and then levering up the earnings yield. I also feel like GIS might eat their lunch with the Annie's brand, if they keep the organic bona fides in place. Now that you are gutting the sucker, despite the price jump in Kraft shares, is it still a good idea to buy Kraft in the low 80s? This is the question I am trying to figure out. My nose tells me there is value and am now trying to figure out if this makes any sense. I see two big value generators for the combined company: 1. The cost cutting that 3G will do - I here that is around $1.5 billion per year in savings. 2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. (There may also be some domestic benefit to Kraft brands as the Heinz brand is probably more of a "must have" brand, and therefore Kraft sales may get a bit of a bump domestically via greater leverage with grocers, etc). I am looking to put together the valuation relative to owner earnings of the combined company focusing on #1 only at this point. What is the starting multiple. Any views?
jay21 Posted March 25, 2015 Posted March 25, 2015 I see two big value generators for the combined company: 1. The cost cutting that 3G will do - I here that is around $1.5 billion per year in savings. 2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. (There may also be some domestic benefit to Kraft brands as the Heinz brand is probably more of a "must have" brand, and therefore Kraft sales may get a bit of a bump domestically via greater leverage with grocers, etc). I am looking to put together the valuation relative to owner earnings of the combined company focusing on #1 only at this point. What is the starting multiple. Any views? Quick back of the envelope: http://seventeenmile.com/2015/03/25/events-kraft-foods-group-merger-analysis-march-2015/
original mungerville Posted March 25, 2015 Posted March 25, 2015 I see two big value generators for the combined company: 1. The cost cutting that 3G will do - I here that is around $1.5 billion per year in savings. 2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. (There may also be some domestic benefit to Kraft brands as the Heinz brand is probably more of a "must have" brand, and therefore Kraft sales may get a bit of a bump domestically via greater leverage with grocers, etc). I am looking to put together the valuation relative to owner earnings of the combined company focusing on #1 only at this point. What is the starting multiple. Any views? Quick back of the envelope: http://seventeenmile.com/2015/03/25/events-kraft-foods-group-merger-analysis-march-2015/ Thanks - am digesting this.
gfp Posted March 25, 2015 Posted March 25, 2015 Berkshire will end up with $9.5 Billion cost basis on 320 million KRFT shares after (not receiving) the 16.5 dividend. Looks like that stock will be worth over $20 billion and pay a decent dividend. No mention of the preferred, but I bet it's still there earning him 9%. Interesting deal! He said it came about in 4 weeks. I was looking at this too and listening to what Buffett said on CNBC this morning. It basically looks like a double, DAY 1! That certainly seems like a hell of a deal for Berkshire. I think it's more like a double, Year 2. Also, on the "2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. " point - there are certain brands - Philadelphia Cream cheese for example - that Kraft did not retain the International rights to. Perhaps Mondelez will make a deal to send them back to Kraft, but there may be a few brands like Philly that can't just be plugged in to the Heinz international distribution network.
Phaceliacapital Posted March 25, 2015 Author Posted March 25, 2015 Basic model with EV/EBITDA https://docs.google.com/spreadsheets/d/1B7ke-kwvXH4tE-uZ72ShrigzR5LReg6oKByJo2EC4aE/edit?usp=sharing
original mungerville Posted March 25, 2015 Posted March 25, 2015 Berkshire will end up with $9.5 Billion cost basis on 320 million KRFT shares after (not receiving) the 16.5 dividend. Looks like that stock will be worth over $20 billion and pay a decent dividend. No mention of the preferred, but I bet it's still there earning him 9%. Interesting deal! He said it came about in 4 weeks. I was looking at this too and listening to what Buffett said on CNBC this morning. It basically looks like a double, DAY 1! That certainly seems like a hell of a deal for Berkshire. I think it's more like a double, Year 2. Also, on the "2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. " point - there are certain brands - Philadelphia Cream cheese for example - that Kraft did not retain the International rights to. Perhaps Mondelez will make a deal to send them back to Kraft, but there may be a few brands like Philly that can't just be plugged in to the Heinz international distribution network. Thanks re Cream cheese example, I was wondering if this was the case internationally.
jay21 Posted March 25, 2015 Posted March 25, 2015 MDLZ took most of growth out of KRFT - I expect operational improvements to be the main focus in the early years
original mungerville Posted March 25, 2015 Posted March 25, 2015 MDLZ took most of growth out of KRFT - I expect operational improvements to be the main focus in the early years How much value does the have-to-have Heinz brand and its domestic presence bring to the pricing power / shelf space negotiations of a Kraft with its less powerful brands - just purely on a domestic basis. If that domestic value was significant, that would be a good tailwind
jay21 Posted March 25, 2015 Posted March 25, 2015 MDLZ took most of growth out of KRFT - I expect operational improvements to be the main focus in the early years How much value does the have-to-have Heinz brand and its domestic presence bring to the pricing power / shelf space negotiations of a Kraft with its less powerful brands - just purely on a domestic basis. If that domestic value was significant, that would be a good tailwind Always thought most of the KRFT brands were very strong domestically - it was international presence they lacked. They have Kraft cheese, Oscar Meyer, etc. I mean you are probably right - 3G has a history of overachieving wrt synergies (both revenue and expense) I believe. EDIT: presentation: http://files.shareholder.com/downloads/ABEA-3QV6OO/4150781964x0x817729/F232E16C-6B2F-4526-8920-EE2B1C252555/Kraft_Heinz_Investor_Presentation_2015-03-25.pdf
petec Posted March 25, 2015 Posted March 25, 2015 The pref won't keep paying Buffett because they are paying it back as part of the refinancing. They've also considered the Mondelez international rights and have that in their plans.
KCLarkin Posted March 25, 2015 Posted March 25, 2015 Basic model with EV/EBITDA https://docs.google.com/spreadsheets/d/1B7ke-kwvXH4tE-uZ72ShrigzR5LReg6oKByJo2EC4aE/edit?usp=sharing Thanks. A few comments: 1. You assume no dividends in 2015 2. You assume no dividend increases 3. You assume they won't pay down any debt
thepupil Posted March 25, 2015 Posted March 25, 2015 I see new Kraft-Heinz as having a $79B MCAP and $31B of debt for about $110B EV today. Pre-synergies you're looking at about $6.6B EBITDA or 16.5X multiple at the current market. 1.2B shares @ $66 / share (KRFT less special divvy) = $79B equity market cap + $31B of debt / preferred based on 2014 debt of $31.3 billion and EBITDA of $6.6 billion. Pro forma debt factors in the $8 billion preferred stock as 100% debt since it will be refinanced with debt at the first call date in 2016 http://www.businesswire.com/news/home/20150325005810/en/Fitch-Places-H.J.-Heinz-Rating-Watch-Positive#.VRL-qOGqkds
KCLarkin Posted March 25, 2015 Posted March 25, 2015 That's why I said basic :D I know. But if you assume they pay debt down 25% (based on Fitch's projections) and tweak your dividend assumptions slightly, you get 14% IRR.
original mungerville Posted March 25, 2015 Posted March 25, 2015 That's why I said basic :D I know. But if you assume they pay debt down 25% (based on Fitch's projections) and tweak your dividend assumptions slightly, you get 14% IRR. Well with an ROE of 20%, and say a dividend yield on book value at 6% or something, that leaves 14% retained earnings to grow the top line at say 4%...so 10% of GAAP earnings or roughly half of GAAP earnings is not needed to maintain the dividend or grow the business. This should mean roughly half of owner earnings can go to debt repayment. Very roughly.
original mungerville Posted March 25, 2015 Posted March 25, 2015 Buffett confirms there is substantial potential to expand Kraft brands internationally using pre-existing international Heinz infrastructure. http://video.cnbc.com/gallery/?video=3000364700
gfp Posted March 25, 2015 Posted March 25, 2015 Interestingly it sounds like quite a few of the international brand licenses that they put inside Mondelez in the separation will ultimately revert to Kraft over time (by 2020 it sounds like for most?). No factories come back, but Heinz has many facilities around the world to use. I hope Philly cream cheese comes back over.
original mungerville Posted March 25, 2015 Posted March 25, 2015 So we have the cost cutting plus potential international expansion long-term via Heinz infrastructure plus Buffett confirmed (but did not want to say it directly) that they would likely look at other acquisitions via Heinz/Kraft - just like all his other businesses. The news anchor noted there was not that much debt and so maybe future acquisitions could be done with some debt.
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