NEW YORK – Kraft Heinz Co. lost more than $16 billion of its market value on Friday morning after the company reported a barrage of negative news, including large write-downs on its well-known brands.
Shares of Kraft Heinz dropped 27% on Friday to $34.95, the lowest close since the current company was created in a $49 billion merger in 2015. In addition to the write-downs, the company had also disclosed an investigation by federal securities regulators and slashed its dividend.
It was a striking reversal for a company whose cost-management efforts and higher profit margins were seen as a packaged-food industry model. Shares of other food companies were also trading down. Campbell Soup Co. fell 7.4%, J.M. Smucker Co. dropped 5%, and Kellogg Co. was down 2.7%.
The bad news rippled through hundreds of exchange-traded funds Friday: In all, almost 54 million shares of Kraft Heinz are owned by 164 ETFs, according to ETF.com, a trade publication owned by exchange company Cboe Global Markets Inc.
Kraft Heinz said on Thursday it took a $15.4 billion write-down on the value of its Kraft and Oscar Mayer brands, citing significant pressure on their value since the merger.
Many analysts cut their price targets on Kraft Heinz following the report.
“In light of its $15B write-down on its key Kraft and Oscar Mayer brands, we are not confident it can build or maintain brand equity needed to compete in today’s consumer environment in a sustainable, compelling way,” said Piper Jaffray & Co analysts in a report.
Kraft Heinz said it is looking to pare down some of its businesses and deleverage to make way for acquisitions. It would consider selling some brands that didn’t seem to have a competitive advantage or that had low profit margins, Chief Financial Officer David Knopf told analysts in a call. This could better position Kraft Heinz to merge with another food maker, Knopf said.
Some analysts have expressed concern that shrinking revenue, modest earnings growth and a ballooning balance sheet could cause the company to lever up too quickly for the next deal.
The company’s investments in brands and marketing might not create a more sustainable rate of growth, Christopher Growe, an analyst at Stifel Nicolaus, said in a note.
“It is causing investors to question the favorable economics of future acquisitions for the company and its ability to achieve (and hold) the synergies,” he wrote.
Warren Buffett’s Berkshire Hathaway Inc. first partnered with 3G Capital to buy H.J. Heinz Co. in 2013, and the two companies partnered again to finance Heinz’s 2015 merger with Kraft Foods Group Inc.
In early 2017, Kraft Heinz made a $143 billion offer to buy Unilever PLC, which would have been financed with $15 billion each from Berkshire and 3G, Buffett has said, but the approach was rebuffed.
At the end of 2017, Berkshire valued its 26.7% investment in Kraft Heinz at $17.6 billion, up from $15.3 billion a year earlier. Buffett retired from Kraft Heinz’s board last year as he decreased his travel commitments. Two Berkshire employees remain on Kraft Heinz’s board: Greg Abel, vice chairman for noninsurance business operations and one of two candidates to succeed Buffett as chief executive, and Tracy Britt Cool, CEO of Berkshire subsidiary Pampered Chef and Buffett’s former financial assistant.
Like many other food companies, Kraft Heinz has been struggling to keep up with consumer shifts toward simpler ingredients and healthier food. Many of the company’s brands, like Jell-O desserts and Kool-Aid drink mix, clash with current trends.
The company said certain brands – Oscar Mayer hot dogs, Kraft Mac & Cheese – returned to sales growth after several years of declines. But profit margins still suffered, making the brands less valuable.
Kraft Heinz also revealed on Thursday that the Securities and Exchange Commission is investigating its accounting practices in its procure division. Kraft Heinz had concluded an internal investigation into the matter, the company said, spurring a separate $25 million charge in the quarter. The company said it was cooperating with the agency and the charge isn’t material to earnings. Kraft Heinz spends more than $11 billion on procurement annually.
Kraft Heinz also slashed its quarterly dividend to 40 cents a share from 62.5 cents.