Heinz And Kraft To Merge In 2015

 

H.J. Heinz Co. and Kraft Foods Group Inc. (KRFT, $84.39) have announced that they will merge into a new company, The Kraft Heinz Company.

Heinz has been privately owned by 3G Capital and Berkshire Hathaway (BRKa.N, $216,200) since 2013.

The Heinz and Kraft brand names are enhanced by a portfolio of other famous food brands, including Ore-Ida, Oscar Mayer, and Philadelphia.

Shareholders will receive stock in the new company, and a special $16.50 per share dividend, when the deal closes in the second half of 2015.  (Be aware that the deal could fall apart, a competing bid could arise, the stock value could fall during a market downturn, and/or federal regulators could put a halt to the merger.)

The transaction is expected to be accretive to earnings in 2017, meaning that the costs of the transaction will disrupt profit growth in 2015 & 2016.

 

HAVE KRAFT SHARES BEEN FAIRLY PRICED IN THIS TRANSACTION?

Generally speaking, a stock is fairly priced when the earnings per share (EPS) growth rate, plus the dividend yield, are equal to the price/earnings ratio (PE).  If the PE is much higher, then the stock is overvalued.

The consensus earnings estimates for Kraft show EPS growing slowly, at 2.5%, 7.1%, and 5.5% in 2015 through 2017 (December year-end).

The stock’s dividend yield (prior to the merger announcement) was 3.6%; and the 2015 PE was 19.0.

Therefore, with EPS growth of 2.5% and a 3.6% dividend yield, the stock was already significantly overvalued when the pre-merger PE was 19.0.  The current value of the stock, at $84.39, plus the $16.50 special dividend, gives shareholders a current total value of $100.89, and a PE of 31.

I can’t stress enough how ridiculously inflated the buyout price is.  It is not rational for a company to pay 31 times earnings for a company with single-digit earnings growth.

If I owned KRFT shares, I would sell my shares immediately.  I absolutely would not wait another 6-12 months to receive the special dividend, or shares in the new company.  I would recognize the gift that was just handed to me, in terms of the share price shooting up $23, and I would take the money and run.

Special note: Kraft Foods Groups Inc. (KRFT) and Mondelez International (MDLZ) were the result of a spin-off and name change of Kraft Foods Inc. (KFT) in October 2012.

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Happy investing!

 

 

Crista Huff

President

Goodfellow LLC

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