Kraft Heinz to Sell Part of Cheese Business for $ 3.2 Billion

Kraft Heinz company KHC 0.31% is partnering with a large portion of its cheese business, a sign of the challenges facing food companies whose operations as complex as the coronary virus epidemic meet unprecedented demand.

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Kraft Heinz said on Tuesday that it had reached a deal to sell its American natural cheese business and a mix of other cheese brands in North America and internationally to France’s group Lectellis SA for $ 3.2 billion.

The Wall Street Journal first reported that sales were imminent before Tuesday. Producers of Heinz Ketchup and Oscar Mayer said Meat, among many other foods, is part of a plan to simplify their business and focus on brands that have the best potential to resonate with contemporary consumers.

“We strayed from the consumer,” Kraft Heinz chief development officer Nina Barton said in a virtual meeting with investors on Tuesday. “We are rebuilding the connection.”

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Groceries, including packaged foods, have risen during the coronovirus epidemic as consumers have stocked their pantries and moved mostly to eating at home. But some established companies have lost market share, as their sales have accelerated because they cannot keep up with unexpected demand. The sudden need for more cleaning supplies, protective equipment and delivery trucks cut their profit margins.

Kraft Heinz began overhauling its portfolio of dozens of brands when the epidemic struck. While Kraft Heinz struggled to make enough macaroni and cheese to meet demand, contestants gained grounds such as General Mills Inc. with their Progresso Soup and Betty Crocker Baking Mix. An epidemic in Kraft Heinz’s challenges since the company’s merger in 2015 made one topic clear: bigger is not always better.

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Nestle SA, Unilever PLC and other large food manufacturers have also made significant splits in recent years to better focus their operations.

Kraft Heinz has struggled since its merger with consumers for foods that seem trendier or healthier, and for lower-priced store brands. The pressure to revive sales has reduced 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 a market capitalization of about $ 40 billion, not exceeding its debt load of about $ 30 billion. is. The company said some of the proceeds from the sale to Lactali have been kept to reduce debt.

Kraft Heinz said at its investor meeting that it plans to cut costs by $ 2 billion over five years, returning to the strategy that prompted the company’s formation in the merger five years ago. This year it is starting with gross savings of $ 350 million to $ 400 million.

Shares of Kraft Heinz rose 0.3% to $ 31.97 on Tuesday.

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Near Lactalis, a global dairy company based in France, produces brie, ricotta and other things in the US and sells them under brands including President.

The company entered the US nearly 40 years ago and was in an expansion spree, acquiring Stoneyfield organic yogurt in 2017 from Danone SA in a deal worth $ 875 million.

Adding the craft cheese business will boost the company’s footprint at a time when demand for staple groceries is already high amid the coronary epidemic.

The sale will include blocks of craft sliced ​​and cheese and the Cracker Barrel brand in the US, Breakstone’s Cottage Cheese and Sour Cream and some other assets. Craft Heinz will house Philadelphia Cream Cheese, Velvetta, Cheese Whiz and Kraft Singles in the US, it will also maintain its macaroni-and-cheese business worldwide.

Kraft Heinz’s brand sales were approximately $ 1.8 billion compared to last year, accounting for about 7% of the company’s annual revenue.

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

Lactalis comes in the form of a sale, with Kraft Heinz reorganizing its business under six new platforms that say what consumers want, such as more convenient food and snacks, rather than 55 different grocery categories. The new approach, officials said, will help make the company more agile and innovate more effectively.

In the years following the merger, Kraft Heinz generated costs of approximately $ 1.7 billion in net savings. It faced sales growth and market share.

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It lost many of its biggest brands’ values. Since February 2019, Kraft Heinz has reduced the value of its brands by nearly $ 20 billion.

Kraft Heinz chief executive Miguel Patricio said the company, which is partly of Brazilian investment firm 3G Capital, had a focus on cost cutting and shortsighted decisions were made under its former leadership. In an interview, he said, “We’re changing that mind-set.”

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

Mr Patricio said Kraft Heinz would be more strategic about how it would cut costs and invest more savings in marketing its brands, rather than passing it all to the bottom line as the company had done in the past. did.

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

RBC Capital Markets LLC was the financial advisor to Kraft Heinz and Paul, Weiss, Refundcond, Wharton & Garrison LLP served as their legal advisors. Perella Weinberg Partners was the financial advisor to Lactalis, and Dentons served as its legal advisor.

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