M&A Project

Department of Humanities, Social
Sciences and Economics
Program:
M.Sc. Banking & Finance
Student ID: 1103190010 Intake: October 2019
Subject: Mergers and Acquisitions
Title of work: Financial analysis of merger of Heinz HJ and Kraft Foods Group
Course leader: Professor Tampakoudis
Ioannis
Submission date: 10/7/2020
I confirm that the work I have submitted is: My own unaided work
Date: 7/7/2020
Marker’s Feedback:
Final Mark:

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Financial Analysis of Merger of Heinz
HJ and Kraft Foods Group
Thessaloniki, July 2020

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Contents
Contents.......................................................................................................2
Abstract........................................................................................................3
Introduction .................................................................................................4
Theoretical Analysis......................................................................................7
The Companies...........................................................................................................7
Heinz HJ Company ..................................................................................................7
Kraft Foods Group Inc.............................................................................................8
Berkshire Hathaway ...............................................................................................9
3G Capital Inc..........................................................................................................9
Information about the merger and the new Kraft Heinz Company.........................10
The case with Kraft Heinz Company and Unilever Inc. ............................................12
Analysts’ Opinions ................................................................................................13
Statistical Analysis......................................................................................15
Revenues and Profits................................................................................................15
Financial Ratios.........................................................................................................17
Liquidity Ratios .....................................................................................................17
Leverage Ratios.....................................................................................................17
Profitability Ratios ................................................................................................17
Market Capitalization...........................................................................................18
Investment Ratios.................................................................................................18
The share of Kraft Heinz Company...........................................................................22
Ratings......................................................................................................................25
Competition..............................................................................................................28
Conclusion..................................................................................................33
References .................................................................................................35

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Abstract
The purpose of this assignment is to analyze the merger of Kraft Heinz Company
both theoretical and on a financial basis. Kraft Heinz Company began with a
horizontal merger of the two companies Kraft Foods Group and Heinz HJ, which took
place in 2015. The analysis was conducted for 2015 which is the year of the merger
and for the years after that until 2019, the year that the Company has the latest
financial statement. To make the statistical analysis, we select information from the
financial reports of the separated companies and the new combined company.
Financial ratios and graphs are created due to analyze the case, to show how the
announcement of the merger affects the companies and how the new company-
operated after the merger. The founds show that the merger affects both of the
companies and the market in a positive way at first but some years after the merger
company had a downhill phase in comparison with competitors’ main due to its
culture and strategy that follows all these years.

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Introduction
Mergers and Acquisitions are a very important part of the corporate operation. In
the latest years merges become more and more known and are used for many
companies as an opportunity to expand its businesses, to enter in new markets, to
increase their sales, and assets and to enhance its competitiveness.
Specifically, Mergers and Acquisitions are the consolidations of companies or assets
through various types of financial transactions, including mergers, acquisitions,
consolidations, tender offers, purchase of assets, and management acquisitions.
The terms "mergers" and "acquisitions" are often used in the same way, although in
actuality, they hold slightly different meanings. When one company takes over
another entity, and establishes itself as the new owner, the purchase is called an
acquisition. On the other hand, a merger describes two firms of approximately the
same size, who join forces to move forward as a single new entity, rather than
remain separately owned and operated. This action is known as a "merger of
equals." Both companies' stocks are surrendered and new company stock is issued in
its place (Investopedia). The main difference is that mergers are usually friendly
however acquisitions can be hostiles. In practice, both of the methods are an
acquisition.
Mergers and Acquisitions have different types depending on the type of company
and mainly the relationship between the companies which is involved in a deal. So,
the types of mergers are:
 Horizontal Merger is a merger of two or more companies that operates in the
same industry and shares the same product lines and market.
 Vertical Merger is a merger of two companies that operates in the same
industry but is in the different stages of production like a customer and a
supplier.
 Co-generic Merger is a merger in which the two companies are related
through basic technologies or markets and refer to the same consumer. Co-
generic merger classified into product extension and market extension
merger.
1. Product extension refers to two companies selling different but
related products in the same market.
2. An extension merger refers to companies that sell the same product
to different markets.
 Conglomerate Merger is a merger that two companies have not are related
to regarding the business area that they are referred to.

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 Cross-border Merger is a merger that takes place within the country.
Companies can achieve diversification through these mergers.
This analysis is referred to the merger of Kraft Foods Group with Heinz HJ Company.
The merger is a horizontal merger between the two companies. The purpose of this
financial statistical analysis is to observe and analyze how the merger was done, how
the announcement of the merger affects the two separated companies and their
shareholders, and how the new combined company operated the years after the
merger.
The case of the merger of Kraft Foods Group with Heinz HJ, which took place in 2015,
was a friendly successful merger which is created a new combined company with the
name Kraft Heinz Company. This analysis contains a theoretical investigation of the
merger. More specifically, there is some basic information about the merger, the
two companies, and the main shareholders of Heinz and the new Company.
Additionally, later in the analysis, there are details about the merger, when it was,
how it was done, how the announcement of the merger that took place on 25 March
of 2015 affected the shares of two companies, and what was the opinion of the
shareholders. Specifically, there is an analysis of the price of the merger and some
theoretical analysis about the case of Kraft Heinz Company and Unilever.
Moreover, below in the analysis, there is a statistical analysis. Statistical analysis
contains some basic financial ratios that show how the merger affected the acquirer
company (Heinz HJ) and ratios after the merger which shows how the new combined
company operated after the merger and why there was a reduction in sales and his
income after it.
Continuing, there is a statistical analysis of the share of the company and what it
was, affect the downgrade phase of the stock price. According to the rating of the
two companies and of the newly merged company show how was change the year of
the merger and the years after that. There is information for the ratings from
Moody’s credit agency.
Also, an interesting chapter of this assignment is the competition of the new
combined company. There is a comparative analysis of the Company with the four
biggest competitors of it and with the S&P index. It is interesting to see if the
company follows the sector and the competitors or has a different trend.

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The purpose of the assignment is to understand and analyze the merger of these two
big companies and how this affects the market. Is it successful eventually or there
were mistakes from the two companies?

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Theoretical Analysis
The Companies
Heinz HJ Company
The H. J. Heinz Company is an American food and international food processing and
packaging company H.J. Heinz Inc. (Heinz) is mainly known for its ketchup. The
company was founded by Henry J. Heinz in 1869. The company now is based in
Pittsburgh (PA). After the turn of the millennium, the company came under
increasing pressure from activist shareholders. The company is based in Pittsburgh
(PA).
Heinz started with Ketchup from Henry J. Heinz who began a small food business
with his brother and cousin in 1876. Heinz Tomato Ketchup was among the
company’s first products, and it is now Heinz’s most iconic brand, claiming more
than 50% of the market share for ketchup in the U.S. Heinz eventually bought out his
partners and established the H. J. Heinz Co. in 1888. That company was incorporated
in 1905 with Heinz serving as the first president, a position he held throughout his
life as he built more than 20 processing plants throughout the country.
In 2006 CEO of the company came under pressure from Nelson Pletz’s Trian Group.
After a proxy fight, Peltz won two seats on the board. While both Heinz and Peltz
claimed victory, it became clear there was a battle ongoing regarding the long term
strategy for Heinz. This battle for control and direction left Heinz vulnerable and
made it a potential target for acquisition. Over the next few decades, Heinz
continued to grow with brand acquisitions like Starkist Tuna and Ore-Ida.
On February 14, 2013, BHI and 3G announced the acquisition of Heinz (Reuters,
2013) for $72.50 per share in cash. The transaction was valued at approximately $28
billion; at that moment the largest acquisition in the food industry in history
(Berkshire Hathaway, 2013). Berkshire Hathaway and 3G would each own half of
Heinz, with 3G running the company. After the acquisition BHI and 3G implemented
drastic cost reductions, leading to an increase in profit margins significantly above
the industry average.

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Kraft Foods Group Inc.
Kraft Foods Group is one of the largest manufacturers of fast-moving consumer
goods with a focus on grocery items, in North America and worldwide, with net
revenues of $18.2 billion and earnings before income taxes of $1.4 billion in 2014.
They manufactured and marketed food and beverage products, including cheese,
meats, refreshment beverages, coffee, packaged dinners, refrigerated meals, snack
nuts, dressings, and other grocery products, primarily in the United States and
Canada, under a host of iconic brands. The company based in Chicago (IL).
Kraft’s origins began with Canadian immigrant James L. Kraft, who started a
wholesale door-to-door cheese business in Chicago with his brothers. They
incorporated it in 1909. Meanwhile, a company called National Dairy Products
Corporation was aggressively acquiring dozens of small dairy products companies
throughout the U.S. and eventually snapped up Kraft in 1930. National Dairy
changed its name to Kraft Corp. in 1969.
Phillip Morris Companies then acquired Kraft in 1988 after taking over General Foods
in 1985. Philip Morris then acquired Nabisco Holdings in 2000 and integrated the
companies into Kraft General Foods, which it began to sell off in 2007. Through the
share sales, Kraft Foods Inc. became a fully independent public corporation.
Kraft Foods has a long history of acquisitions and divestments. Kraft Foods continued
an aggressive streak of mergers, buying French biscuit company Groupe Danone for
$7 billion in 2007 and British candy company Cadbury for more than $19 billion in
2010. Integration turned out to be difficult and a split of the company between its
candy and grocery related activities were considered. Then in 2012, Kraft Foods
divided into two: a U.S. grocery products company called Kraft Foods Group Inc. and
an international snacks company called Mondelez International. The spin-off was
formally completed in October 2012 (Kraft Heinz Company, 2012). After the spin-off,
Kraft showed a low net sales growth.
Kraft Foods Group produced brands like Oscar Mayer, Oreo, Philadelphia cream
cheese, Tang, and Maxwell House among many others. It was an independent public
company listed on the Nasdaq exchange for about four years before merging with
H.J. Heinz Company in 2015, creating the third-largest U.S. foods company.

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Berkshire Hathaway
Berkshire Hathaway is an American multinational conglomerate holding
company headquartered in Omaha, Nebraska, United States. The company headed
by its well-known CEO and Chairman Warren Buffett. The company was founded by
Oliver Chace in 1839 and is headquartered in Omaha, NE. Berkshire Hathaway Inc.
provides property and casualty insurance and reinsurance, utilities and energy,
freight rail transportation, finance, manufacturing, retailing, and services. It operates
through the following segments: GEICO, Berkshire Hathaway Reinsurance Group,
Berkshire Hathaway Primary Group, Burlington Northern Santa Fe, LLC (BNSF),
Berkshire Hathaway Energy, McLane Company, Manufacturing, and Service and
Retailing. (Forbes, 2020)
The strategy of BHI is to invest in, preferably undervalued, companies with strong
financial fundamentals and equally strong brands, for the long term or even
indefinitely. By streamlining expenditures as well as the financial structure of these
companies, BHI aims to increase the free cash flows of these companies to ultimately
increase dividend payments as well as equity value.
3G Capital Inc.
3G Capital is a global investment firm focused on long-term value, with a particular
emphasis on maximizing the potential of brands and businesses. The Founding
Partners of 3G Capital are Jorge Paulo Lemann, Marcel Telles, Carlos Alberto
Sicupira, Roberto Thompson, and Alex Behring, all of whom have together been
investing in and operating businesses for several decades. The firm has offices in
New York City and Rio de Janeiro.
Most recently, in July 2015, 3G Capital partnered with Berkshire Hathaway to
complete the combination of H.J. Heinz Company and Kraft Foods Group, forming
the Kraft Heinz Company, following 3G and Berkshire’s acquisition of Heinz in June
2013. Previously, in December 2014, 3G Capital completed the combination of
Burger King and Tim Hortons, forming Restaurant Brands International, following
3G’s acquisition of Burger King in October 2010. Affiliates of 3G’s Partners are
meaningful shareholders of AB Inbev since 1989 and Lojas Americanas since 1983.
(3G Capital)

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Information about the merger and the new Kraft Heinz Company
In early 2015, Berkshire Hathaway (BRK-B) and 3G Capital, which was the main
shareholders of Heinz, teamed up the Kraft Foods Group and H. J. Heinz Company to
create a new company, The Kraft Heinz Company (KHC). The merger of the
companies took place on March 25, 2015, when both of the companies announced
their intention to merge into one company.
The Board of Directors of both companies agreed to the terms of the merger. Heinz
HJ shareholders own 51% of the new Kraft Heinz Company (KHC) and the
shareholders of Kraft Foods own 49% of it. Kraft shareholders received stocks in the
combined company and a special cash dividend of $16.50 per common share. The
main shareholders of Heinz and the newly merged company Berkshire Hathaway and
3G Capital invested an additional $10 billion to cover the paid of the special
dividend.
The amount of this dividend is more than a quarter of the closing share price of Kraft
on March 24. Each share of the Kraft Foods Group entitled the shareholder to one
share of the new entity (Forbes, 2015). Kraft common stock was converted into the
right to receive, on a one-for-one basis, shares of Kraft Heinz common stock. Heinz
shareholders Owners of Heinz common stock first saw their share converted into a
0.443332 share of Heinz common stock. After this conversion, all remaining shares of
Heinz common stock were exchanged for an equal amount of shares of KHC.
The merger is horizontal because both of the companies belong to the same sector
and they wanted to reduce their competitors so as to create a strong company with
a diversified portfolio that would be contained a more than a billion of famous and
profitable brands because both Kraft Foods and Heinz HJ have been pioneers in the
food industry for more than 100 years.
The market reacted positively to the announcement of the merger since the price of
the Kraft Food share ended on 24 March at $61.33 and opened the day of the
announcement on March 25 at $81.45. The share price had an increase of 32.81%.
Table 1: Share price of Kraft Foods Group
Date/
Price
March 24 March 25
Stock Price $61.33 $81.45

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The merger completed successfully on July 2, 2015, after the series of transactions
and Heinz HJ Company renamed as Kraft Heinz Company. The stock of the Kraft
Foods Group stopped trading on July 2, 2015, at $88.19 and started trading of a new
combined Kraft Heinz Company on July 6, 2015, at $71.00. This difference between
prices can be explained by the special dividend of $16.50 per share.
Table 2: Share Price of the target and the newly company
July 2 July 6
Share price $88.19 $71.00
If the merger of the two companies was not completed Kraft Foods Group would
have paid $1.2 billion in the Heinz HJ Company. The merger valued approximately
$52 billion and the newly merged company will expect to have annual sales revenues
approximately $28 billion.
Table 3: Total consideration exchanged of merger (in millions)
Aggregate fair value of Kraft
common stock
42,502
$16.50 per share special
cash dividend
9,782
Fair value of replacement
equity awards
353
Total consideration
exchanged
52,637
The new combined Kraft Heinz Company became the third-largest food and
beverage company in North America and the fifth-largest in the world, with eight $1
billion+ brands five brands between $500 million and $1 billion with sales in
approximately 190 countries and territories. The Company’s iconic brands include
Kraft, Heinz, ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Maxwell House,
Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Weight Watchers
Smart Ones and Velveeta. In the new Kraft Heinz Company the chairman of Heinz,
Alex Behring, assumed chairmanship of the new company. The vice chairmanship is
reserved for Kraft’s current chairman and CEO, John Cahill. Bernardo Hees, the CEO
of Heinz, retained his title as the two companies merge into a single firm. The
common stock of the company is listed on The NASDAQ Global Select Market
(“NASDAQ”) under the ticker symbol “KHC”.

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At first, KHC expected $2.0 billion integration costs, the result of workforce
reductions; asset-related costs as well as lease and contract terminations. Moreover
the management of the two companies had announced that they expected to realize
$1.5 billion in annual cost savings by the end of 2017, as a result of this deal. The
cost synergies would mostly come from higher economies of scale in the North
American market. Having a larger volume of sales would help the company drove
better bargains with clients such as large retail outlets and specialty food stores and
restaurants. This would expect to improve the operating margins of the company
and also gave it an advantage in getting more shelf space in retail outlets (Forbes,
2015).
The case with Kraft Heinz Company and Unilever Inc.
Kraft Heinz Company decided to increase its value and size, so it turned to mergers
and synergies with many companies but some of them did not happen. The most
worth mentioning case was in 2017 when KHC had the intention to acquire personal
care conglomerate Unilever Plc.
In 2017 Kraft Heinz Co offered a $143b takeover bid to Unilever so as to build global
consumer goods. That was an ambitious campaign that would have put dozens of
the best-known names in consumer households around the world. But less than 48
hours later, Kraft Heinz’s board — including Warren E. Buffett and the Brazilian-born
billionaire Jorge Paulo Lemann — decided to reject the offer. The breakdown in deal
talks sparked speculation among analysts and investors about whether Kraft might
attempt to purchase another large consumer goods company as a backup plan. The
alternative would have been to pursue a public and possibly costly fight against
Unilever, a bulwark of British and Dutch business.
Kraft Heinz Company said for the rejection offer of the merger that respects the
culture, strategy, and leadership of Unilever. Unilever quickly responded by saying
that the $143 billion offer, a roughly 18 percent premium on the company’s closing
stock price on Thursday, was too low and that it saw no reason to engage in talks.
(New York Times, 2017)
Shares of Kraft Heinz jumped more than 10 percent when Kraft Heinz announced the
offer for a merger to Unilever, while those of Unilever rose 15 percent and according
to Wall Street Kraft's offer had been at an 18% premium to Unilever's closing share
price on Thursday before the offer announcement, Kraft shares rose 11%. The higher
the price, the smaller the worth of the deal. So the bid was withdrawn within 55
hours of it being announced.

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After the offer was withdrawn by the Kraft Heinz, the companies sated "Unilever and
Kraft Heinz hold each other in high regard”. The bosses of both consumer giants
spoke it was clear that if Kraft wanted Unilever it would have to start on a hostile
takeover bid that could have ended up being very expensive.
In addition to Kraft Heinz spokesman Michael Mullen said “Kraft Heinz’s interest was
made public at an extremely early stage and we intended to proceed on a friendly
basis, but it was made clear Unilever did not wish to pursue a transaction. It is best
to step away early so both companies can focus on their independent plans to
generate value.’’
Many reports suggested that Prime Minister Theresa May had asked officials to
examine the deal before it was scrapped. However, the spokesman of Kraft Heinz
said that Downing Street was not involved in Kraft's decision to withdraw the offer.
Kraft Heinz is jointly controlled by billionaire investor Warren Buffett and Brazilian
private equity group 3G, that he has a reputation for taking a cut down to costs-
irrespective of how that might impact jobs and factories. Unilever, on the other
hand, has a reputation for doing the right thing in terms of corporate social
responsibility and the environment.
As a result, Unilever feared that a merger with Kraft, under 3G Capital’s persistent
cost-cutting, risked the value of its brands and could slow down its expansion in
emerging markets, which requires more investment, according to people familiar
with the company’s thinking. Moreover, Unilever believes that household products
and consumers care divisions were too different from Kraft Foods business.
Kraft withdrew its offer because it felt it was too difficult to negotiate a deal and
because it was sure that this deal would become a hostile merger due to strategy,
culture, and believes of Unilever. It was obvious that Unilever was not ready to
accept this deal because the two companies are- until today- very different
companies not only with the projects but with the strategy that it follows, as well.
Analysts’ Opinions
Martin Deboo an international analyst said, "It would appear that Kraft Heinz has
underestimated both the intrinsic value of Unilever and the challenge of acquiring
control of a Dutch company whose stakeholders would have opposed such a move
vociferously".

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George Salmon, a Hargreaves Lansdown analyst, said shelving the deal just one
business day after it was announced came as a surprise. "It was always going to be a
difficult pitch to convince shareholders to relinquish their grip on Unilever, given the
expectations for the company to keep churning out resilient growth in the years to
come," he said.
An analyst Andrew Lazar said, “We believe this announcement serves as a reminder
- if needed - of (Kraft’s) interest, capacity, and commitment to pursuing large-scale
M&A in a potentially near-term time horizon”.
The deal would have been one of the biggest in corporate history, combining dozens
of household names. Particularly, a combination would be the third-biggest takeover
in history and the largest acquisition of a UK-based company, according to Thomson
Reuter’s data. The combined entity would have $82 billion in sales. Unilever owns
Ben & Jerry's ice cream, Dove soap, and Hellmann's mayonnaise, while Kraft's range
includes Philadelphia cheese and Heinz baked beans.
Kraft Heinz has been advised by Lazard and the law firm Paul, Weiss, Rifkind,
Wharton & Garrison; Unilever received advice from the banks Centerview Partners,
Morgan Stanley, UBS, and Deutsche Bank.

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Statistical Analysis
In this chapter of the assignment, the purpose is to understand and analyze if the
merger had a positive or negative impact on the two companies and how the
merged company operated in the years after the merger.
Revenues and Profits
Revenue can be defined as the amount of money a company receives from its
customers in exchange for the sales of goods or services. Revenue is the top line
item on an income statement from which all costs and expenses are subtracted to
arrive at net income. In addition to, EBITDA is the company’s earnings before
interest, taxes, depreciation, and amortization and Net income can be defined as the
company's net profit or loss after all revenues, income items, and expenses have
been accounted for.
Table 4: Revenues and profits of the acquirer and new company (in millions)
2014 2015 2016
Sales $10,922 $13,338 $26,300
EBITDA $2,092m $3,614m $6,591m
Net Income $-63 $-266 $3,416
On the table above are presented the revenue and the profits of the acquirer
company Heinz HJ before the merger and the profits of the new combined company
after the merger. After the merger of the two companies sales increased by almost
49%. Sales of the two companies before the announcement and completion of the
merger was as the picture below.

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Picture 1: Sales of the two companies before the merger
It is obvious that Kraft Foods Group had bigger revenues than Heinz HJ because Kraft
referred to an extent market and had more products than the other company.
Especially, Heinz derives 60% of its sales from regions other than North America.
Emerging economies contribute 25% of its sales. Kraft, on the other hand, derives
98% of their sales from North America. So, the merger allowed selling Kraft’s brands
in international markets.
EBITDA increased after the merger as well as revenues due to savings from
Integration and Restructuring activities and other ongoing productivity efforts,
favorable pricing net of commodity costs. Also, the management of the two
companies on the announcement day has announced that they expect to realize
$1.5 billion in annual cost savings by the end of 2017, as a result of this deal.
Additionally, net income had the biggest increased throughout these years. From
2014 to 2015 net income became 76% lower regarding the previous year. In 2014
and 2015 net income was under zero due to the expanses of the merger. In 2016,
this is the fiscal operation year after the merger net income increased at a level of
13%. In this year net income became again positive due to lower costs because of
the merger.

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Financial Ratios
Liquidity Ratios
Liquidity ratios are the ratios that show the ability of a company to cover its
liabilities. Quick ratio shows the ability of a company to convert its current assets to
cash so as to cover its short term liabilities. The Quick ratio expressed as:
Quick Ratio = (Current Assets-Inventories)/Short Term Liabilities
Leverage Ratios
Leverage ratios are the ratios that show how much capital comes in the form
of debt (loans) or assesses the ability of a company to meet its financial obligations.
The leverage ratio category is important because companies rely on a mixture
of equity and debt to finance their operations, and knowing the amount of debt held
by a company is useful in evaluating whether it can pay off its debts as they come
due. A well known financial leverage ratio is debt-to-equity ratios that are expressed
as:
Debt/Equity = Total Liabilities/Total Shareholders’ Equity
A high debt/equity ratio generally indicates that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense. If the company's interest expense grows too high, it may
increase the company's chances of a default or bankruptcy.
Profitability Ratios
Profitability ratios are a class of financial metrics that are used to assess a business's
ability to generate earnings relative to its revenue, operating costs, balance sheet
assets, and shareholders' equity over time, using data from a specific point in time.
Some of the most known profitability ratios are the net profit margin, ROE, ROA, etc.
The Net profit margin concerns a company's ability to generate earnings after taxes.
Return on Assets can be defined as an indicator of how profitable a company is
relative to its total assets. The more assets a company has amassed, the more sales
and potentially more profits the company may generate. As economies of scale help
lower costs and improve margins, returns may grow at a faster rate than assets,
ultimately increasing return on assets.
ROA = Operating Earnings/Total Assets

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Return on Equity is a ratio that concerns a company's equity holders the most since it
measures their ability to earn a return on their equity investments. ROE may
increase dramatically without any equity addition when it can simply benefit from a
higher return helped by a larger asset base.
ROE = Operating Income/Total Equity
As a company increases its asset size and generates a better return with higher
margins, equity holders can retain much of the return growth when additional assets
are the result of debt use.
Market Capitalization
Market capitalization refers to the total dollar market value of a company's
outstanding shares of stock. Commonly referred to as "market cap," it is calculated
by multiplying the total number of a company's outstanding shares by the current
market price of one share (Investopedia).
Investment Ratios
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that
measures its current share price relative to its per-share earnings (EPS). The price-to-
earnings ratio is also sometimes known as the price multiple or the
earnings multiple. P/E ratios are used by investors and analysts to determine the
relative value of a company's shares in an apples-to-apples comparison. It can also
be used to compare a company against its historical record or to compare aggregate
markets against one another or over time. The formula and calculation used for this
process follow (Investopedia).
P/E Ratio = Earnings per share/Market value per share
The Dividend Yield, expressed as a percentage, is a financial ratio that shows how
much a company pays out in dividends each year relative to its stock price. The
reciprocal of the dividend yield is the dividend payout ratio. The dividend payout
ratio is the ratio of the total amount of dividends paid out to shareholders relative to
the net income of the company.

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Table 5: Financial ratios of the acquirer and the merged company
2014 2015 2016
ROA -0.24% -0.35% 2.81%
ROE -0.79% -0.69% 5.69%
Debt/Equity 1.82 0.43 0.52
Quick Ratio 1.21 1.03 0.64
Net Profit Margin -0.58% -1.45% 12.99%
The table above presents some basic financial liquidity, profitability, and leverage
ratios of the acquirer company and the new combined company the year before, at
and after the merger. All the financial ratios of the company decreased from 2014 to
2015 (the year of the merger) and increased in 2016, which is the first fiscal
operating year after the merger. It is obvious from the table above that the acquirer
company, Heinz HJ, before the merger, has done, operated in low order. In 2016,
the first full year after the merger, net sales jumped as a result of the merger from
$18.3 to $26.5 billion.
More specifically, return on assets and return on equity followed the same tend
these three years. Both of the profitability ratios were under zero the first two years
of the table and in 2016 increased at the level of 2.81% and 5.69%, respectively. ROA
and ROE were under zero due to extremely low net income which was under zero, as
well. Besides, the year before the merger total current assets were approximately
half than the year at and after the merger. In 2014 total equity of the shareholders
was $15.656m and the merger became $66.213m. The net loss of the company was
more than offset by higher interest expense, other expense, the provision for
income taxes, and additional preferred dividend payment, as follows:
 Interest expense increased to $1.3 billion for the year ended 2015, compared
to $686 million in the prior-year period. This increase was due primarily to a
$236 million write-off of debt issuance costs The remaining increase was due
to the assumption of $8.6 billion of Kraft's long-term debt obligations in the
2015 Merger, partially offset by interest savings following our 2015
refinancing activities.
 Other expense, net increased to $305 million for the year ended, compared
to $79 million in the prior-year period. This increase was primarily due to a
$234 million nonmonetary currency devaluation charge related to
Venezuelan subsidiary and call premiums of $105 million related to 2015
refinancing activities, compared to currency losses of $99 million in the prior
year.
 The effective tax rate was 36.2% for the year ended, 2016 compared to
16.3% for the year ended December 28, 2014, primarily driven by higher

20
earnings repatriation charges, non-deductibility of nonmonetary Venezuela
devaluation loss and higher charges for foreign uncertain tax positions,
partially offset by increased benefits from statutory tax rate changes as well
as additional benefits from foreign income taxed at lower statutory rates.
(Financial Statements of Kraft Heinz, 2015)
Additionally, from the table above, the debt-equity ratio decreased from 2014 to
2015 and increased again after the merger. The ratio decreased due to an increase in
the shareholders’ equity more than increasing of the total debt. This means that at
the year of the merger and after that company’s shareholders’ value was above total
liabilities and the firm depends more on its activities and investments on equity
value.
The quick ratio of the acquirer and the new combined company followed a
downgrade phase. This outcome means that the firm lost its ability to convert
current assets to cash so as to cover short term liabilities. The total current assets of
the firm increased from 2014 to 2015 due to the impact of the merger.
The net profit margin of the new combined company had a huge increase in 2016
due to an increase in net income.
Table 6: Financial ratios of new Kraft Heinz Company
2016 2017 2018 2019
ROA 2.81% 9.11% -8.75% 1.88%
ROE 5.69% 18.12% -16.33% 3.74%
Debt/Equity 0.52 0.52 0.59 0.55
Quick Ratio 0.64 0.44 0.85 0.68
Net Profit
Margin 12.99% 41.96% -38.8% 7.75%
The table above shows some basic financial ratios of the Kraft Heinz Company the
years after the merger. According to the table above ROA, ROE and net profit margin
follow the same tend again. Both of the ratios increased in 2017 and dropped under
zero in 2018 because of the reduction of net income this year.
Operating income/ (loss) decreased 268.7% to a loss of $10.2 billion in 2018
compared to income of $6.1 billion in 2017. This decrease was primarily due to
higher impairment losses in 2018. Impairment losses were $15.9 billion in 2018
compared to $49 million in 2017. The remaining $390 million decrease in operating
income/(loss) was due to higher input costs and strategic investments. These
decreases to operating income/(loss) were partially offset by lower Integration
Program and other restructuring expenses, the favorable impact of foreign currency.

21
Furthermore a net loss to common shareholders decreased from 193.2% to a loss of
$10.2 billion in 2018 compared to income of $10.9 billion in 2017. The decrease was
primarily due to the operating income/(loss) factors as a lower tax benefit,
unfavorable changes in other expense/(income), net, and higher interest expense.
The debt-to-equity ratio and the current ratio were almost unstable for the years
after the merger. According to the company’s consolidating financial statements, in
2018 the firm tried to make more investments than the previous years and that was
the reason why the ratio presents that loss. In 2019 all of the ratios above showed a
level of increase.
More specifically, the problem with Kraft Heinz Company began a year before 2018.
In the diagram below we can see that the year after the merger (2016) net sales
were at a peak regarding all the other years. The year after that presented a
decrease in sales, which has continued since today. Particularly, in 2017 net sales
decreased by 0.9% to $26.1 billion in 2017 compared to $26.3 billion in 2016. The
impacts of foreign currency and acquisitions and divestitures were flat. Organic Net
Sales decreased 0.9% to $26.0 billion in 2017 compared to $26.2 billion in 2016 due
to unfavorable volume/mix (1.5 pp), partially offset by higher pricing (0.6 pp).
The first signs of trouble appear when net sales dropped from $26.5 to 26.2 (-1.13%)
even though the U.S. economy grew by 2.3% that year. Because COGS and SG&A
decreased even more, by $0.9 billion, but still considerably lower than expected $1.5
billion synergies by the end of 2017, the operating income increased. The net income
showed an increase from $3.45 to $10.99 billion.
The 2017 Consolidated Statements of Income shows the first results from the
implemented zero-based budgeting strategy; the focus on cutting costs to increase
profits yielded results in the short term, but the underlying figures started to
deteriorate. Net sales figures started to decrease despite the good state of the U.S.
economy at that moment.
The newly combined company also seems increasingly dependent on a few large key
customers. The 2016 annual report noted that Wal-Mart Inc., KHC’s largest
customer, represented 10% of net sales in 2014 before the merger, 20% after the
merger in 2015, and 22% in 2016. No figures are released on other key customers,
but it is assumed that just a few large grocery chains are responsible for the bulk of
KHC’s annual net sales. This gives these key customers significant buying power
when negotiating with KHC. As mentioned, revenue growth stagnated after the
merger. In 2018 net sales growth was only 0.7%.

22
On February 21, 2019, KHC announced a loss over the fourth quarter of $12.61
billion, mainly due to a $15.4 billion write-down on intangible assets related to the
Kraft and Oscar Meyer brands (Kraft Heinz Company, 2019).
Graph 1: Net sales for the years before and after the merger
The strategy, which company followed after the merger, was to cut out costs and
focused mainly on the integration plan by reducing expenses. This strategy made the
company not to make investments and search for new customers or in another way,
not to focus on its existing customers and their preferences. That harmed the
maintaining and developing brands and as well as to increase its market share and
value.
The share of Kraft Heinz Company
The table below shows the number of shares of Heinz HJ before the merger and the
number of stocks of the new combined company after the merger.
Table 7: Number of outstanding shares
2014 2015 2016
Number of Shares
(million)
377 786 1,226
0
5000
10000
15000
20000
25000
30000
2014 2015 2016 2017 2018 2019
Net Sales
Net Sales

23
It is obvious that shareholders value increased after the merger since the Heinz
obtained 51% of the new company and Kraft Foods owns the remaining 49%. All
these decisions that the company made regarding the cut off strategy affect the
share price, as well. On the table below are presented the market capitalization and
some share’s price ratios of the combined Kraft Heinz Company.
Table 8: Investment ratios for KHC 2016-2019
2016 2017 2018 2019
Market
Cap.(billion) $58.13 $106.27 $95.30 $54.28
P/E 28.86 8.32 6.44 20.21
Dividend per
common
share
$2.70 $2.33 $2.48 $1.60
Dividend
yield 3.55% 3.05% 4.77% 5.17%
The market capitalization of the Kraft Heinz Company starts increasing until 2017
that became $106.27b. A year after that market capitalization starts decreasing until
today. This happened because the price of the share decreased more and more, as
showed in the graph below. Many investors maintain that the Company year after
year is losing its value due to the strategy that it followed after the merger.
It is undeniable the fact that the P/E ratio decreased by 246% to 8.32 compared to
28.86 in the previous year. In 2018 the ratio remained at a low level but in 2019
increased again 213.84%. This reduction was owing to both the price of the share
and the earnings per share. In 2018 the Company had net losses earnings per share
of -8.36 due to net income/loss to common shareholders.

24
Graph 2: Stock price of Kraft Heinz Company 2015-2020
Furthermore, dividend per share and dividend yield accessible some increases and
decreases through years after the merger 2015. The Company paid common stock
dividends of $3.2 billion in 2018, $2.9 billion in 2017, and $3.6 billion in 2016.
Additionally, on February 21, 2019, the Board of Directors declared a cash dividend
of $0.40 per share of common stock, which was payable on March 22, 2019, to
shareholders of record on March 8, 2019. Additionally, on May 21, 2019, our Board
of Directors declared a cash dividend of $0.40 per share of common stock, which is
payable on June 14, 2019, to shareholders of record as of May 31, 2019.
KHC further announced it would reduce its dividend by 36%. In reaction to this
sequence of negative information, the share price of KHC dropped dramatically by
approximately 28% (from $48.18 to $34.95) on February 21, 2019, as it showed in
the diagram of the stock price above. This drop in the share price, the write-down on
assets together with the allegations regarding accounting malpractices, has even
resulted in several class action complaints filed against KHC (Yahoo Finance, 2019).
Additionally, the share price of the company might happen due to the
announcement of sales of a substantial number of shares of firm’s common stock in
the public market, sales of its common stock by the Sponsors, or the perception that
these sales might occur, and this impaired company’s ability to raise capital through
the sale of additional equity securities. A sustained depression in the market price of
its common stock has happened (in November and December 2018, which was a
0
10
20
30
40
50
60
70
80
90
1/8/2015
1/11/2015
1/2/2016
1/5/2016
1/8/2016
1/11/2016
1/2/2017
1/5/2017
1/8/2017
1/11/2017
1/2/2018
1/5/2018
1/8/2018
1/11/2018
1/2/2019
1/5/2019
1/8/2019
1/11/2019
1/2/2020
1/5/2020
KHC

25
contributing factor to its decision to perform an interim impairment test for certain
reporting units and brands in the fourth quarter of 2018) which also reduced its
market capitalization below the book value of net assets, which could increase the
likelihood of recognizing goodwill or indefinite-lived intangible asset impairment
losses that negatively affected its financial condition and results of operations.
Kraft Heinz, 3G Capital, and Berkshire Hathaway entered into a registration rights
agreement requiring registering for resale under the Securities Act all registrable
shares held by 3G Capital and Berkshire Hathaway, which represents all shares of the
Company’s common stock held by the Sponsors as of the date of the closing of the
2015 Merger. As of December 29, 2018, registrable shares represented
approximately 49% of all outstanding shares of its common stock. Sales of
Company’s common stock by the Sponsors to other persons increased in the number
of shares being traded in the public market and may increase the volatility of the
price of its common stock.
Ratings
A credit rating is a quantified assessment of the creditworthiness of a borrower in
general terms or to a particular debt or financial obligation. A credit rating can be
assigned to any entity that seeks to borrow money—an individual, corporation, state
or provincial authority, or sovereign government. Credit ratings issued by credit
agencies.
Credit rating agencies typically assign letter grades to indicate ratings. Standard &
Poor's, for instance, has a credit rating scale ranging from AAA (excellent) to C and D.
A debt instrument with a rating below BB is considered to be a speculative-grade or
a junk bond in which means it is more likely to default on loans. The global credit
rating industry is highly concentrated, with three agencies—Moody's, Standard &
Poor's, and Fitch - controlling nearly the entire market. (Investopedia)

26
Picture 2: Scale of credit ratings of the three credit agencies
In this analysis, information about credit ratings for the acquirer company before
and after the merger is collected by Moody’s agency.
Table 9: Credit ratings for Heinz HJ and Kraft Heinz Company
2014 2015 2016
Heinz HJ B2 B2 Baa3
Kraft Foods Baa2 Baa2 Baa3
According to the table above, Heinz HJ (old company) at the announcement day of
the merger had a credit rating which was equal to the B2 rating. Concerning the
scale of ratings, this rating means that Heinz Company belonged to the junk
company’s which it was highly speculative to default and extremely difficult to make
investments and deals. On July 2, four months after the merger, at the completion
day of it, the credit rating of the company upgraded to Baa3 from B2. The firm’s
credit rating jumped from junk ratings to investment credit ratings due to the
merger. The credit rating of the company until February 2020 remained Baa3, as it is
shown in the diagram below.

27
Picture 3: Credit rating of Kraft Foods Group
Following Moody’s credit agency, in 2013 and on 25 March of 2015, (the
announcement day) Kraft Foods Company had a rating of Baa2, which was five steps
bigger than Heinz’s rating on these dates. On July 2, 2015, the creditworthiness of
Kraft Foods Group downgrade to Baa3 from Baa2, almost on grade down regarding
the credit rating scale. That downgrade of the Company’s credit rating happened due
to the merger of the two companies and particularly due to the already low rating of
Heinz. It is obvious that the new combined company is presented as an investment
company which is received the lower medium grade. The diagram below is
presented the tendency of the credit rating of Kraft Foods Group the years before
and after the merger.
Picture 4: Credit rating of Kraft Heinz Company

28
Many analysts believe that some part of the cost savings of a new company would
also come from the ability of the combined company to refinance Heinz’s high-
yielding debt. Since Kraft has a much better credit rating, the combined entity will be
able to replace such debt with low-yielding, investment-grade debt. Additionally,
Heinz’s preferred stocks that become callable in June 2016 will also be replaced with
such debt. This will help reduce the total cost of capital for the combined company.
Not only Moody’s evaluate the company with these ratings but the other credit
agencies such as Fitch and S&P, as well. However, in February 2020 the latest rating
affirmation of the credit agencies Fitch and Standards & Poor downgraded Kraft
Heinz Company to junk status. That happened due to the announcement that
quarterly sales were lower than expected and wrote down the value of some
businesses.
Besides, Shares of Kraft Heinz, in which billionaire Warren Buffett’s Berkshire
Hathaway Inc (BRKa.N) and Brazilian private equity firm 3G own major stakes, fell
about 4%. Chicago-based Kraft Heinz, which took a $15.4 billion write-down of key
brands including Oscar Mayer hot dogs, has been struggling to grow sales as
consumers shift to healthier options and private-label brands.
In addition to the company’s decision to maintain its dividend regardless of the
decrease of the sales forced Fitch to downgrade the rating of the Kraft Heinz Foods.
Fitch estimated the company needs to divest up to 20% of its projected EBITDA to
support debt reduction. The downgrading of creditworthiness makes the
investments to be riskier.
Competition
Consumer staples Food is a sector that is one of the most competitive and fast-
moving sectors because of their products. The sector includes essential products for
people such as food & beverage, household goods, and hygiene products; but the
category also includes such items as alcohol and tobacco. These goods are those
products that people are unable - or unwilling - to cut out of their budgets regardless
of their financial situation. Consumer staples sector is non-cyclical because people
demand all these goods at a relatively constant level regardless of their price.

29
Comprising nearly 70% of the nation’s gross national product (GNP), consumer
spending holds a lot of sway over the economy. Economic growth and decline are
typically led by consumer spending, which is cyclical. Cyclical means there are ebbs
and flows, or times when the consumer spends more and periods when they have
more conservative spending habits (Investopedia).
The consumer staples sector has outperformed all but one sector since 1962.
According to the S&P Dow Jones Indices, for most of the 10 years ended April 2019,
the consumer staples sector has returned 12.97% annually. Compare this to the
15.53% return of the S&P 500 over the same period, a gap has occurred mainly in
the last two years, but usually the two moves pretty much in lockstep.
More importantly, the consumer staples sector has outperformed the S&P 500
during the last three recessionary periods, or periods of negative growth in the gross
domestic product (GDP). Due to their low volatility, consumer staples stocks are
considered to play a key role in defensive strategies.
Kraft Heinz Company belongs to the consumer staples sector and the old companies
Kraft Foods Group and Heinz HJ, as well. It is very important to see in what stage is
the company regarding its factor. According to the diagram below, after the 2017
Kraft Heinz Company and the sector had a downgrade tendency. This was become
mainly due to changes in consumer preferences, intensifying competition, and new
technologies.
The traditional old groceries operate in a low force. This increased mergers and
acquisitions in this sector. For example, in 2017 4,972 mergers and acquisitions took
place. It is obvious from the diagram below that Kraft Heinz Company had a lower
performance comparing with the S&P 500 and S&P consumer staples food & soft
drinks products. KHC is in the shakeout phase of the industry life-cycle, which is
generally characterized by mass-market replacement purchases, fights to defend or
gain market share at the expense of competitors, price competition, and on the
shakeout phase, failure of mergers and acquisition leads to excess capacity in the
industry. The rivalry between existing competitors can become more alike as
industry conventions emerge, technology diffuses and consumer tastes converge.
This will also lead to a fall in operating margins and industry profitability, driving
weaker competitors from the market (Porter, 2008).

30
Picture 5: Cumulative total return of KHC, S&P 500 and S&P consumer staples & soft drinks
products
The Company has incredibly strong competitors against it. The increased
competition of the company and higher than expected supply chain costs was the
reason why the company in the fourth quarter of 2018 performed under the
expectations of management and shareholders.
Competitors include large national and international food and beverage companies
and numerous local and regional companies. The Company competes with both
branded and private label products sold by retailers, wholesalers, and cooperatives.
Some of the biggest company’s competitors are Mondelez, Nestle, Kellogg’s, General
Mills, Unilever, Danone, and more others. In the diagram below are presented the
daily prices of the shares of four competitors of Kraft Heinz Company. Specifically,
Nestle, Unilever, General Mills, and Mondelez compared with Kraft Heinz share
prices from 2015 until today.

31
Graph 3: Shares Prices of KHC and Competitors 2015-2020
The price of the stock of Kraft Heinz Company has a downgrade tend to compare
with the competitors who share prices moving in a stable or upgrade mode. In 2015
KHC had the biggest share price due to merger and the special cash dividend to the
Kraft’s Shareholders. In 2016 it increased and then the price of share started to
decrease until today.
By the diagram, Nestle has a higher share price almost all the period under scrutiny.
The shares prices of General Mills, Unilever, and Mondelez move to the same price
frame approximately between $40 and $60. It is clear that in late 2019’s all of the
companies lost some value because all of the shares had a decrease in their share
price.
The competitors of KHC follow the sector and how this move except for the
Company, which had a different price level compared to the other companies. This
means that KHC has a highly competitive environment and need to make
investments and movements to follow the sector and became a strong competitor as
well. The strategy that KHC followed all those years after the merger was extremely
risky. The Company focused mainly on reducing costs and expenses and not to
making profitable investments to create wealth and value for itself and its
shareholders. It tried to make mergers and acquisitions so as to gain value, to
become more competitive and, to enter new markets but not all these mergers were
profitable and helpful for the operating performance of the Company.
0
20
40
60
80
100
120
140
8/6/2015 8/6/2016 8/6/2017 8/6/2018 8/6/2019
Prices
of
sticks
MDLZ
UN
KHC
GIS
NSRG

32
As a result of all this, the increased consolidation due to mergers in the grocery retail
industry results in increased buying power for the large chains and puts pressure on
operating margins of suppliers like KHC, as well as other (globally) competing
companies like Nestle, The Kellogg’s Company, General Mills, Unilever, Danone, and
Mondelez. The major brands of all these companies are under pressure from
cheaper private label brands of major grocery chains. Therefore, consolidation in the
fast-moving consumer goods/grocery manufacturing sector seems a logical result in
order to also achieve economies of scale and reduce costs if these companies want
to remain competitive as well (or stay in business at all).

33
Conclusion
In conclusion, Kraft Heinz Company made a successful friendly merger cause
acquisition agreed from both boards. The Company became the third-largest food
and beverage company to North America and fifth in the world including more than
a billion brands to its portfolio. The company the full year after the merger (2016)
operated successfully regarding the sales, income, and financial ratios. However, in
2017 the company started to lose its value due to its expanses for synergies and the
strategy that it follows.
The Kraft Foods Group acquired by Heinz which main shareholders are 3G Capital
Investment Company and Berkshire Hathaway. The strategy of these two companies
is zero-based budgeting which focuses only to reduce costs and expenses. The KHC
made the strategy of synergies as a part of the main strategy show to increase its
value and power. However, employees have problems with the cost efficiency
strategy and with the culture, that company is adopted.
Furthermore, many of the brands are under pressure from competitive budget
private label brands. The Company focused all these years only on cutting costs and
lost the way and the preferences of the consumers. One reason why sales of the
Company reduced over years after the merger is because of the preferences of the
consumers. Consumers have changed their preferences the over years. Nowadays,
people prefer healthier foods and a healthier way of life avoiding junk and fast foods.
Kraft Heinz Company did not change its strategy and culture all these years and as a
result, is the downgrade phase of the company. Its culture is one of the main reasons
why the company failed to acquire Unilever, which has a different culture for it and
its employees. As a result of this, the company gave a very low rating in comparison
with its competitors. The Company had cultural problems at first because it did not
align both cultures of the companies’ success.
In 2019, shares of Kraft Heinz fallen almost 27%. 3G Capital has sold its shares from
Kraft Heinz Company but Warren Buffet has not had any movement about its stocks.
On March 2020 he admitted and said “I was wrong in a couple of ways about Kraft
Heinz, we overpaid for Kraft.”
KHC needs to deal with these problems and needs to acquire (parts of) other
companies to create healthier and organic foods for the consumers if it does not
want to become a target itself. Many of its competitors have already made these
healthier foods. In its current state, KHC will probably find it harder to acquire new
companies in the (near) future; shareholders of target companies as well as lenders

34
will probably question whether KHC can create value from the new combination and
demand an all-cash deal, higher price if stocks are involved in the purchase or higher
interest rates.

35
References
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reporter. Retrieved from https://www.bbc.com/news/business-39022692
Berkshire Hathaway. Information about the company. Retrieved from
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36
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k122714.htm
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company-and-kraft-foods-group-sign-definitive-merger-0
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37
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