Kraft Heinz's Financial Recipe Turns Sour

(Bloomberg Opinion) -- Kraft Heinz Co.'s facade is beginning to crack.

After the close of trading Thursday, the packaged-food company delivered a triple whammy to investors: It said it took a $15.4 billion writedown in the fourth quarter. It also said it had received a subpoena from the Securities and Exchange Commission associated with an investigation into its “accounting policies, procedures, and internal controls” regarding procurement agreements. And the company cut its quarterly dividend by 36 percent. The stock sold off more than 17 percent as of 6 p.m. New York time.

Kraft Heinz said the impairment charge was related primarily to its U.S. refrigerated-foods and Canadian retail divisions, as well as trademarks for its Kraft and Oscar Mayer brands — two of the company's biggest moneymakers. While all the old guards of the supermarket aisles are struggling as consumers opt for fresher, less-processed and more on-the-go food items from upstart businesses, Kraft Heinz's writedown may also speak to underinvestment in its brands. As for the SEC probe, the disclosure doesn't necessarily signal wrongdoing or the need for significant financial revisions, but it does further sully the image of a company that already didn't sit well with some investors. (The company said its own investigation into the matter determined that the necessary adjustments weren't material to previous results and that it doesn't expect them to be in the future.)

Kraft Heinz's strategy has centered on debt-driven acquisitions and ruthless cost-cutting to create earnings growth and deliver margins that far surpassed peers, thus making up for shortfalls in revenue and internal investment. It's precisely why some shareholders were captivated by the stock — at least initially. Even before Thursday, the stock tested its lowest level since Kraft and Heinz merged in 2015. But it helped that Warren Buffett helped orchestrate the deal and that his Berkshire Hathaway Inc. remains its biggest owner. (The No. 2 shareholder is 3G Capital, the private equity firm Berkshire teamed up with and whose managers run Kraft Heinz.) I've wondered when Buffett's admiration for the business would fade — or get the best of him. Thursday's post-market decline amounts to a $3 billion loss in value on Berkshire's stake.

A year ago, Kraft Heinz pulled another doozy by unexpectedly releasing a 70-slide narrated presentation to perhaps try to circumvent its disappointing performance for that quarter. In it, the company committed to refreshing its brands and introducing new products. On Thursday, management said it had made progress, citing mid-single-digit sales growth (rather than declines) for product lines such as Kite, Philadelphia and Classico, as well as investments in newer items like Just Crack an Egg microwavable bowls.

Even so, Thursday's announcements were ugly. Unfortunately, under Kraft Heinz's strategy, the easiest way out of a mess is to just do another megamerger. The formula is: borrow, slash costs, juice earnings. It seems as if that's exactly what the company is thinking, too, because CEO Bernardo Hees cited industry consolidation as one of his top objectives for the year.

The question is, who would want to sell to Kraft Heinz now?

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.