Understanding the 3G playbook
A moreunreservedly upbeat viewof the impact Kraft Heinz is having on the food and beverage industry was shared by Kevin V. Dreyer, co-chief investment officer, value, at Gabelli.
“It’s Kraft and more broadly the 3G-backed entities in the space,” he said. “They have a clear playbook. They acquire a business, aggressively cut costs and raise margins much higher than others in their industry, more than many people believed was possible. Their performance since acquiring Heinz and then Kraft — they’ve really delivered on everything they are set up to do. They also deleverage rapidly, which puts them into a great position to do more deals. And they are aided in part by a stock market that has been giving them the benefit of the doubt.”
As a result, market value has provided 3G with valuable currency for potential mergers.
While other companies have emulated the 3G approach, Mr. Dreyer said most food companies continue to see sales growth as a central goal, and 3G has not.
In Mr. Dreyer’s view, the verdict on the 3G approach is in. The acquisition of Kraft was completed in 2015, relatively recently. But the history of 3G with other businesses, notably what has become Anheuser-Busch InBev N.V., demonstrates the company’s success is sustainable, he said.
“They (3G Global) have an enviable track record across the board,” he said. “They do look for leading brands with strong positions in their categories. They’ve increased profit significantly with the Kraft portfolio.
“The next company they buy will have synergies. Remember, with Heinz, they were a financial buyer. Once they owned Heinz, they were able to generate synergies with the merger. They have a business model they are very good at. I have no doubt they could apply to others in the food industry.”
With Unilever in the Kraft Heinz rearview mirror, a number of analysts, including Mr. Dreyer, have identified Mondelez International, Inc. as a prime candidate for takeover by Kraft Heinz.
Pablo Zuanic, an analyst with Susquehanna Financial Group, New York, acknowledges the attraction of Mondelez to 3G but believes PepsiCo, Inc. may prove a more likely target.
“The Kendall Jenner commercial, the aspartame to-be-or-not-to-be zigzagging, the new, new, new alt low-cal cola (Pepsi Zero sugar), the ongoing underperformance in U.S. carbonated soft drinks (25% “only” of the company), the lack of scale in non-c.s.d. non-alcoholic ready-to-drink beverages versus Coca-Cola (other than Gatorade), and now talk of PepsiCo buying a Brazilian dairy company Vigor S.A., all paint a picture of a company still struggling to set a new direction,” Mr. Zuanic said. “In this regard, we think (PepsiCo) may be more vulnerable than Mondelez to a Kraft Heinz bid (jointly done with Anheuser-Busch InBev).”
Mr. Zuanic acknowledged numerous qualities 3G may see in Mondelez, including a stock price trading at a 5% discount to PepsiCo, based on Susquehanna’s calculations. Heavy investor activism at Mondelez could make that company riper for takeover, and the market profile of Mondelez attractive to Kraft Heinz in order to diversify sales away from North America. In 2016, only 27% of sales were North American at Mondelez.
In analyzing the economic metrics of a potential Mondelez and PepsiCo acquisition for Kraft, the differences were not clear cut. For example, he said Mondelez would be more accretive than PepsiCo food/snacks (28%, versus 25%) but that PepsiCo would provide a higher incremental return on invested capital (5.8%, versus 5.2%). Ending debt-to-EBITDA would be 5.8% in the case of Mondelez and 5.6% for the PepsiCo snack/foods business.
Mr. Zuanic explained, “We also see greater strategic fit for Kraft with PepsiCo food/snacks (than with Mondelez) and argue that PepsiCo beverages fit Anheuser-Busch InBev better than Coca-Cola, as the PepsiCo bottling operations in key regions (including North America) remain in the hands of PepsiCo (Coca-Cola, on the other hand will be fully refranchised by end of 2017).”