Kraft Heinz Rises on Deal Speculation, Profit Beat

(Bloomberg) -- Kraft Heinz Co. shares soared Friday amid speculation the company could be circling Campbell Soup Co. as it finds its own growth elusive.

Shares surged the most since February 2017, propped up by better-than-expected quarterly results and a fresh report in the New York Post that the company had started preliminary talks about a deal. Despite the strong quarter, sales slipped 0.4 percent, heightening pressure to pursue an acquisition.

Chief Executive Officer Bernardo Hees was not asked directly about the Campbell speculation on Friday's earnings call, but said the company's thinking about potential mergers has not changed. Kraft Heinz is interested in “big brands” with international sales potential and thinks the food industry is ripe for more consolidation, Hees said.

“We want to be a force behind it when it happens,” he said.

Kraft Heinz, formed in a 2015 merger orchestrated by Warren Buffett and 3G Capital, has struggled to grow sales with its stable of traditional brands, which include Maxwell House, Oscar Mayer and Capri Sun. The company has used cost cuts to boost profit.

Shares of the food giant gained as much as 9.4 percent to $64.99 on Friday in New York, the biggest intraday gain since news hit last year that the company had made an offer for Unilever. The shares have been hammered since that deal fell apart. The stock had lost 24 percent this year through Thursday's close.

Deal Rumors

Kraft Heinz has studied some of Campbell's financial data though hasn't made any offer, the New York Post said, citing two people close to the situation it didn't identify. Kraft Heinz isn't likely to offer much of a premium to the recent share price, the report said.

Campbell shares have spiked in the past two months on speculation regarding such a deal. The soup-maker is undergoing a strategic review after its CEO abruptly departed in mid-May, leaving the company without a permanent leader.

Activist shareholder Dan Loeb is meeting with family shareholders who own a combined 41 percent of Campbell Soup, trying to convince them to sell, the New York Post said. It reported that Campbell hired Deloitte to estimate tax implications of a sale for those shareholders, and it's using the Teneo PR firm to help defend itself against Loeb.

Related: Kraft Heinz Needs Another Big Deal to Make Buffett's Bet Pay Off

Deloitte was hired to lead the review of Campbell's business and is not looking at the tax implications for family shareholders, a source with direct knowledge of the situation told Bloomberg News.

The Campbell speculation comes after Kraft Heinz was rebuffed by Unilever in 2017. That failed deal came along right on schedule: four years after Buffett helped 3G take Heinz private and two years after they combined the company with Kraft in a $55 billion deal.

Bloomberg News also reported on Friday that Kraft has narrowed its list of bidders for a portfolio of businesses in India that could fetch $1 billion, according to people familiar with the matter.

Cost Cuts

3G's managers are known for aggressive cost cuts that quickly boost profit margins. Earlier this year, Kraft Heinz said it had cut more than $1.7 billion of expenses after integrating the two businesses.

Enthusiasm about the company's results was tempered by slightly by rising costs that will hamper profit in the second half of the year. Tariffs in Canada and rising domestic freight costs will hit results, the company said.

Even with higher input costs, the company said its performance will improve by the end of the year, a good sign as it battles in a competitive grocery market.

“There's some relief that the trends have improved,” said Ken Shea, an analyst at Bloomberg Intelligence. “This company doesn't do a lot of hyping -- the positive statements about the outlook are an improvement.”

To contact the reporter on this story: Craig Giammona in New York at cgiammona@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Molly Schuetz

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