Krafting an exit after struggling to restore growth

After a less than sparkling recovery in Q4 FY14 organic revenue growth to under +3.5% YoY, the Kraft management seems to have thrown in the towel to the current financial masters at Heinz (Berkshire Hathaway and 3G Capital) and agreed to its ‘merger’ offer. While conceding most of the plum jobs in the new combine to the Heinz crew, Kraft management have managed to extract terms that are by no means too shabby, not withstanding that probably over 75% of the exit value to Kraft shareholders will be in the new KraftHeinz shares rather than straight cash.

Being somewhat generous in the below analysis by not including pension liabilities or deal costs (including severence etc), and pricing in a market average growth rating of approx +5% CAGR for both groups as well as for the NPV of the $1.7bn of planned cost synergies,  the post merger value of the offer to Kraft shareholders comes to over $73 per share (including the $16.5 ps cash component) as against the stand alone valuation for Kraft which tops out at around $54 per share.  This suggests that on a comparable underlying growth rating for both groups, that the Heinz shareholders are conceeding to the Kraft ones an above weighting (c. 68%) of the synergy benefits.  The other side of this coin however, may well be that the Kraft employees end up as the ones that ultimately pay this price.  There seems no greater love than for a management to lay down their workers careers for their shareholders.  Whether this is reflected in their own termination settlements however is another matter!

Valuation implications of merger