Kraft Heinz to Separate Into Two Publicly Traded Companies

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0:47Scarlet Fu:Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Kraft Heinz to separate into two publicly traded companies. Jen Bartasch joins a senior retail stables and packaged food analyst at Bloomberg Intelligence. Jen, what is Kraft Heinz doing? It wasn't just like 10 years ago they put the companies together. Hi, Paul. Yes, it was just about a decade ago that they put the companies together with the plans that it would become kind of a packaged food powerhouse.

1:33But trends have changed and consumers have changed and it just hasn't materialized the way they originally thought it would.

1:39Scarlet Fu:So what did the two companies get out of this merger then? So, you know, when we're looking at what they brought together, they brought together some products where they were able to recognize some synergies. They were able to do some co-branding, some product development, that sort of thing. But as I said, the consumer has changed. And demand for shelf-stable packaged food products is just less than it was. And so we've seen multiple years where scanner data shows that Kraft Heinz brands have sort of been shrinking a little bit. And I think this separation is an attempt to kind of reinvigorate growth in different parts of their portfolio.

2:16When Kellogg split the two companies, they ended up selling to private owners. Could something similar happen here? There is that possibility. It definitely echoes what Kellogg did. They took their emerging markets, they took their higher growth brands, spun them off into Calanova, which then got acquired by Mars, or is in the process of being acquired by Mars. W.K. Kellogg was their residual North America a cereal business, was recovering from strike issues and distribution issues, and that has been snapped up by Ferraro. So there's definitely a possibility that a Kraft Heinz split could result in the same sort of end result down the road.

2:57Scarlet Fu:You mentioned several times how the consumer has changed. Let's dig into that a little bit more. Are we talking about because of the anti-obesity drugs like GLP-1? Is it a case where RFK and make America healthy again is really taking root. I mean, this is kind of a slow moving shift in the consumer, right? It is indeed, Scarlett. It's a slow moving shift. And it started, you know, coming out of the pandemic. In the pandemic, everybody sort of retreated to familiarity, right? They went back to brands, they went back to shelf stable products. And since then, there's been more emphasis on things that are more natural, lower sodium, healthier for you, that sort of thing.

3:36And while Kraft Heinz has been making updates to their portfolio, it is hard to envision how kind of electric orange mac and cheese has a long-term growth, long-term growth appeal to people where, you know, there's pressure from, as you said, RFK on more like natural colorants and things like that. So, you know, their portfolio is caught in that crosshairs. You know, again, as a former banker, I probably told my clients, hey, when you announced is saying the stock's going to go up. Well, stock's down here. When you put companies together, the press release often talks about the synergies that are going to be, the cost synergies, maybe some revenue synergies, maybe.

4:13Are there dis-synergies when you break them apart? Yeah, there are dis-synergies. The company expects about$300 million in dis-synergies. Thankfully, most of their manufacturing practices are fairly separate, but there is a component to that. The stock is down today, but this isn't really new news. Kraft Heinz actually said in May they were exploring strategic options. There's been repeated rumors that it would result in a split of two companies. So the confirmation today isn't necessarily unexpected news.

4:44Scarlet Fu:Paul, to synergies, does that just mean upfront costs? I think so. I need a new CFO. I need a new accounting department. I don't know. So go ahead, Jen. Jen, what's next for the packaged food business? I mean, is this just a industry-wide secular decline? Well, right now, it appears to be, especially in North America, a bit of a secular decline. Pockets of growth are becoming more and more isolated. And so when you're looking at scanner data, the problem is the consumer, as I said, they're shifting behaviors, but they're just not buying as much as they used to. And you see this even with Walmart or Target or Kroger, where people used to buy in multiples and stock up their pantries, and they just don't shop that way anymore.

5:27They're buying more on an as-needed basis, and part of that is the macroeconomic environment. And so that just doesn't favor these companies right now, where historically they've been pantry staples. And so right now when consumers are looking what they're going to make for dinner tonight, a bigger portion of their plate is fresh foods. So the perimeter of grocery stores are doing much better than the center of the store, which is these shelf-stable products.

5:52Scarlet Fu:Let's talk about the folks who brought these two companies together. is Berkshire Hathaway, run by Warren Buffett, and 3G Capital, run by a group of Brazilian operations guys. Where do they stand in all this, Jen? What happens to, do they each still hold stakes in the companies? I mean, do they come out looking better 10 years later? Well, Berkshire Hathaway still has a large stake in the company. I think they own just over 25 % of the outstanding shares. But, you know, they did relinquish their chairs on the board shortly before the strategic options were announced, or that the company was exploring strategic options.

6:30So they've been slowly pulling back. From the time of their initial stake, they're probably still going to come out ahead, but it has been a 10-year play for them. Do we know where they're going to put their shares, or are they going to go equally between the two companies? Because I'd like to invest alongside Warren Buffett, I think. At this point, I don't think that's been disclosed, but it is certainly something that everyone will be watching for.

6:54Scarlet Fu:What will you be watching for, Jen, in terms of how competitors respond or react or move to kind of take advantage of this breakup? I think what will be interesting is to watch the level of promotional activity. There will likely be some effort to take market share. And Kraft Heinz is likely to up their marketing spend in order to try to drive volumes just ahead of when this split actually becomes realized. to sort of show improvement in some of their legacy brands. So what that really sets a stage for is actually probably good for the everyday shopper in that there'll be probably more sale items, more discounts.

7:37But it also means that it's less profitable sales for the companies that are involved in chasing that market share. So it will be interesting to watch how it unfolds. Companies only expecting this to close or to be realized at the second half of next year. So there's some time for those dynamics to play out. Stay with us. More from Bloomberg Intelligence coming up after this.

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8:54on Apple Podcasts, Spotify, or anywhere you listen.

8:59Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Lots of deals out there, but the deals aren't M &A per se. They're most about breaking stuff up. Some of those consumer products companies that have been put together over the last several years, We're seeing some of those companies think about breaking themselves up. One of them is Pepsi. We have Pepsi. We have investor, Elliott Management, activist investor, taking a$4 billion stake in Pepsi, maybe provoking some change down the road.

9:37Let's see what happens there. Ken Shea joins us, Bloomberg Intelligence Senior Consumer Products Analyst here, Ken. Ken, I mean, when you look at Pepsi, you think about it as Frito-Lay and all the snacks on one side and Pepsi and all the other soft drinks on the other side. And it just feels like it's a company that, boy, it could be broken up just like some of these other consumer products companies. What do you think? Yeah, hi, Paul. Actually, it's only a few weeks ago I wrote a report over Bloomberg Intelligence saying that given the weakness of the stock, it's really just a matter of time where these talks are going to be revived.

10:09Recall back in 2014, Tryon, an activist, actually advocated that, breaking the company up between beverages and foods. The company decided not to do it. It made the case that it was getting good synergies between the two. Fast forward to today, Elliott isn't quite going that far. In Elliott's letter today, it said it believes that value can be created by simply having the beverage side, roughly 40 % of the business, just refranchise their bottling operations. In plain English, what that means is to divest those capital-intensive operations, manufacturing operations, that create the finished product from the syrups and concentrates that Pepsi, the beverage company, sells.

10:50That's really the golden part of that business. The jewel of that business is the concentrate business. That's what Coca-Cola does. Coca-Cola sells concentrate syrups at a high margin to third parties to make the product. PepsiCo chooses to do it in-house. That results in tying up capital, lower margins, and so on. At the same time, Elliot is also saying on the food side, perhaps some SKU rationalization is due, meaning there's a lot of food products there that they may not be well-suited to sell. The Frito-Lay is doing really well, although it's kind of a slowdown right now with many consumer products.

11:29It's the Quaker Foods, I think, it's really targeting and saying, you know, maybe some reduction there, may be in order so that's really what the gist is today with pepsi all right ken thank you for that

11:39Scarlet Fu:very very detailed rundown i want to pick up on what you were talking about with the bottling business refranchising the bottling business which is what coca-cola does right now what does coca-cola give up by doing that i mean there had to be a reason why pepsi chose to keep it in-house up until now yeah that's a great question scarlett so go back in time what 10 15 years ago or so both companies had done that. They both had separated those businesses. PepsiCo decided to retain or it sold and then it bought it back and it decided to keep it and made the case at the time that soft drink business was in a downturn.

12:15Volumes were weak. They thought by gaining more control over those bottling operations, they could right size the ship, that they could get it back in order, align the interest between the bottlers and the company. Because you've got to remember, Coca-Cola, by separating it, it is to some degree giving up a little, it's accepting a little risk. I mean, these are third parties, these are independent companies. They can sell beer, they can do other things. PepsiCo didn't want them to do that. PepsiCo said, look, we want you to be fully aligned with what we want. So that's what they said they gained from that.

12:47And I guess there's some truth to that. But you're giving up a lot also for the factors that I mentioned before. Ken, you've been covering this consumer space for a long time. You've seen the cycles come and go. It seems like we're in a cycle of breaking these companies up. I mean, you've seen this game before. How do you think this is going to play out across the consumer space? Well, you know, PepsiCo stock before today was down about 20 % over the last two years. So it's really disappointed investors. And beyond that, it's that their long-term algorithm of high single-digit comparable EPS growth is not going to happen this year.

13:23They're looking at flat earnings, you know, this year. And investors see the writing on a wall. They see a slowdown. And they're saying, look, maybe there's more than just a cyclical element here. Maybe there are some structural things this company can do. I think Elliott's making some good points here. And I think PepsiCo ought to follow through on some of these if they want to regain some of the low sentiment that's out there among investors.

13:48Scarlet Fu:Do you expect other investors to jump in here and and kind of ride on Elliott Management's coattails? I mean, is Elliott going to be empowered to ask for more going forward? That's a great question. I think there are going to be some supporters of Elliott. Like I said, I think Elliott's making some fair points. PepsiCo has been really disappointing on the operational side. And like I said, in the stock front, I think it ought to be open ears to listen to what Elliott says. I think others will support Elliott in this case. Yes. Stay with us. More from Bloomberg Intelligence coming up after this.

14:50on Apple, Spotify, or anywhere you listen.

14:54Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Lots going on in the world of global healthcare. We want to check in with Sam Fazelli. He's the Director of Research for Global Industries and he's senior biotech, pharmaceuticals, all that healthcare stuff. Analyst. He's based in London here. Hey, Sam, we've had a lot of turnover and a lot of uncertainty within our health care, I don't know, Washington, D.C.

15:30government entities. How does that affect the rest of the world here? Oh, that's a very big question, Paul, and lovely to talk to you again. It's been a while. There's all sorts of layers. Of course, you know about USAID, which has been stopped and Lots of projects have been going, have been stopped in terms of funding. Then you have the CDC, which is much more focused on the U.S. The CDC, the Center for Disease Control and Prevention, is the body that is responsible for U.S.'s health. And it is part of the Health and Human Services Division. So HHS Secretary, RFK Jr., is in charge of basically the whole thing.

16:17And there's been major upheavals in terms of people that even they have had to point themselves to the CDC resigning after about a month. I'm talking about Mona Reyes, who was the director of the CDC and just left or was fired because apparently she wasn't prepared to rubber stamp whatever the advisory committee for immunization practices, which is part of the CDC, suggests to the CDC what vaccines should be used, when, how, and that then impacts insurance coverage, she was told, you need to robust up what they say. And of course, she didn't believe that that was the right way to do it. So there's a lot of upheaval.

16:59And we now have another ACIP, Advisory Committee meeting, on the 18th of September. Let's see what they say about COVID vaccines. But already, the U.S.'s access to vaccines has been reduced.

17:11Scarlet Fu:What does this mean Even for the rest of the world, though, Sam, I get what you're saying about insurance coverage in the U.S., but do the equivalent of CDCs in other countries take their cue from the U.S. CDC? No, no, no, no, no, no. In fact, to be honest with you, the federal, the FDA's decision with regards to the limiting of vaccines in the U.S. for COVID for sure has brought the U.S. policy or will bring U.S. policy in line with the rest of the world. In the U.K., I am not 75 yet. I hope We can tell that. You look amazing. Thank you. I need to go A for it until you're 75, right? In the U.S., it was pretty much available to anyone under the age of 64 or 65.

17:51Now it's been limited to 65 and above. So this just brought the rules in line with Europe. So Europeans were already there because of our health care budgets being under constraint, etc. But the U.S. is supposed to be about free choice. And that is where I think the complexity comes in. And what I'm more worried about is that the language and the way they're addressing it is what will cause people more concern about actually going and getting a shot. So what about just if the FDA limits approval of COVID shots, for example, or I don't even flu shots. I'm not sure how they're going to approach it.

18:29That would be more, I guess, out of pocket expense for consumers. Correct. Yeah. Yeah. I think Bloomberg had an article saying that it's going to be like$220,$224 a shot. Now, you and I can probably afford that, right? A lot of people can't. And that will then be the issue that, you know, a pregnant woman, where actually a lot of scientists and medics believe that they should get the shot. And in Europe, it is approved. They do get it. They're not recommended for the vaccine anymore. So that is a problem because then your baby is born with no protection against the virus, which is bad for babies.

19:09So there are these issues. And, of course, we've got this meeting coming up. Don't forget there's another thing coming up in September, this big research they've been doing to try and see what is causing this massive rise in autism. And we'll talk about it, I'm sure, the day the research comes out or that week. I wouldn't be shocked if it comes out and says, oh, here you go. There's evidence that it's caused by there's a correlation with vaccine use or aluminium in vaccines or whatever. And I can show you chart after chart that you can show it's related to glyphosates or high fructose corn syrup that we've used in juices.

19:43You can keep making these correlations. We've done things to our lifestyle that have caused this issue and mental health issues, etc. You can't just pinpoint vaccines until you do a whole retrospective analysis.

19:56Scarlet Fu:Yeah, but that's very complicated and it feels like people want simple answers, Sam. What does this mean for the companies? the companies that develop the vaccines, that sell the vaccines, how are they positioning themselves? Are they pushing back? Well, they can only push back so far. We just saw some tweets from President Trump saying, look, if you've got this great data about vaccines and their safety, and they'd be here, you've got them and their efficacy, why don't you come and show us? I'm sorry. I can show you a link. I can send it to you. We can put it in the show notes or whatever they go into, a link to the CDC meeting where the companies came and the CDC itself did research showing what the effectiveness of the vaccines had been in the previous 12 months, how many hospitalizations it saved, the economic impact and their safety analysis.

20:43What is it that the administration is looking for? They've been presented four or five times a year through that same mechanism at the CDC. Who says these companies are hiding the data?

20:54Scarlet Fu:This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.