Kraft Heinz Reverses Merger Amidst Industry-Wide Divestiture Trend

Kraft Heinz plans to split into two separately traded companies, reversing its 2015 merger. This move aligns with a broader industry trend of large food and beverage companies undergoing divestitures and breakups.

Industry Trends

Divestitures have become a significant part of mergers and acquisitions (M&A) activity in the consumer products industry. In 2024, nearly half of M&A activity in this sector was attributed to divestitures, with 42% of M&A executives preparing assets for sale over the next three years. This trend is not exclusive to consumer packaged goods (CPG); it is also observed in industrial companies like GE and Honeywell, and in legacy media organizations such as Comcast and Warner Bros. Discovery.

In 2024, nearly half of M&A activity in the consumer products sector was attributed to divestitures, with 42% of M&A executives preparing assets for sale over the next three years.

Driving Factors for Divestitures

Several factors contribute to this industry shift:

• Competitive Pressures: Intense competition makes operations more challenging for large entities.
• Evolving Consumer Demand: Consumers increasingly prefer fresh produce and protein over ultra-processed foods, leading to reduced demand and shrinking sales volumes for many CPG products.
• Regulatory Scrutiny: Increased regulatory attention on processed foods, particularly with initiatives focused on public health.
• Impact of GLP-1 Drugs: The rise of diabetes and obesity medications like GLP-1 drugs has led to decreased appetite among some consumers for traditional snacks.
• Market Share Loss: Large CPG companies are losing customers to upstart brands and private-label products, which often operate in higher-growth categories.
• Investor Pressure: Activist investors frequently advocate for companies to concentrate on core offerings and divest underperforming or non-core assets to improve valuations and reset expectations.
• Operational Complexity: Growing too large can make companies less agile, hindering quick decision-making and efficient investment into the business.

Notable Examples and Outcomes

• Kraft Heinz: The 2015 merger initially garnered investor enthusiasm, which later declined due to lagging U.S. sales, significant write-downs of brands like Kraft and Velveeta, and a Securities and Exchange Commission (SEC) subpoena related to accounting practices. The company's focus on aggressive cost-cutting was cited as a primary reason for its underperformance, with shares decreasing by 73% since the merger.

• Keurig Dr Pepper: The 2018 merger of Keurig Green Mountain and Dr Pepper Snapple Group formed Keurig Dr Pepper. Analysts expressed skepticism about the strategic rationale of combining coffee and carbonated soft drinks. Since the merger, the company's shares have risen 37%, underperforming the S&P 500, which climbed 150% over the same period.

• Kellogg: In contrast, Kellogg successfully split into snacks-focused Kellanova and cereal-centric WK Kellogg in 2023. This separation was followed by acquisitions: Ferrero acquired WK Kellogg for $3.1 billion, and Mars acquired Kellanova for $36 billion. This outcome is viewed by some analysts as having created more shareholder value than the combined business.

Future Outlook

Experts hold varying views on the effectiveness of divestitures. Some analysts suggest that merely selling brands does not address underlying capability issues. However, the success of Kellogg's breakup has led some investors to hope for a similar outcome for Kraft Heinz, envisioning potential acquisitions of its resulting entities. Steve Cahillane, former CEO of Kellogg and Kellanova, will lead Global Taste Elevation, the placeholder name for one of Kraft Heinz's spinoffs featuring high-growth brands. Berkshire Hathaway, Kraft Heinz's largest shareholder, is reportedly preparing to sell its 27.5% stake, potentially due to uncertainty regarding value creation from the breakup.