Kraft Heinz (KHC.US) Split Plan Annoys Buffett Moody's Warns or Downgrades Its Investment Grade Rating

The Zhitong Finance App learned that after Kraft Heinz (KHC.US) announced plans to split its business, uncertainty about its future capital structure attracted market attention. International rating agency Moody's has added the company to the credit rating downgrade watch list and initiated a comprehensive review of investment ratings.

According to a press release issued by Moody's, the agency has placed Kraft Heinz's “Baa2” senior unsecured rating and “Prime-2” commercial paper rating on a downward watch list, while adjusting the rating outlook for all associated entities from “stable” to “under observation.”

Moody's pointed out that although this split plan may increase business focus, the two new entities still need to continue to manage the market operations of their respective mature brands in the current market environment where consumer spending is tightening.

According to the split plan disclosed by Kraft Heinz on Tuesday, it is planning to split the business into two separate companies. This move essentially unravels a major merger and acquisition deal that led the company ten years ago to become one of the world's largest packaged food sellers.

According to the plan, one of the companies will focus on sauces, spreads, condiments, and storable foods. Its brands cover classic products such as Heinz Ketchup, Philadelphia Cream Cheese, and Kraft Cheese Macaroni; the other company will focus on the grocery business and own brands such as Oscar Mayle Ham, Kraft Single Product Cheese, and Lunchables Kids Lunch Box.

The company stressed that both entities will maintain investment-grade credit qualifications after the split, and that existing debts will be taken over or refinancing arrangements made by the newly established Taste Elevation Co.

Moody's review focused on the risks and potential benefits of implementing the split plan, including the operating prospects of Taste Elevation and the North American grocery business segments, as well as the finalized capital structure and financial policies.

The agency paid special attention to changes in Kraft Heinz's leverage ratio after the split, as the company plans to finance the North American grocery business by issuing new bonds and repay some of its existing debts. Although preliminary assessments suggest that the two new companies' leverage ratios may remain as low as 3 times, the specific debt structure and dividend policy have yet to be finalized.

It is worth mentioning that the split plan triggered public dissatisfaction from Buffett, the largest shareholder. As head of Berkshire Hathaway, who holds 27.5% of the shares, Buffett made it clear in an interview that he was disappointed that the board of directors did not seek shareholders' opinions and directly promoted the split.

The investment guru made it clear: “If someone makes an offer to buy shares from us, we will not accept a joint takeover offer unless other shareholders get the same conditions. Merging Kraft and Heinz was certainly not a perfect decision back then, but a forced split today may not solve the problem.”

The split marks a substantial reversal of the 2015 merger and acquisition case that changed the industry landscape. Back then, a merger deal jointly planned by Buffett's Berkshire Hathaway and 3G Capital integrated Kraft and Heinz into the world's second-largest food company. After the merger, the original Kraft shareholders held 49% of the shares and Heinz shareholders held 51% of the shares.

The progress of the current split plan has not only raised public questions from the largest shareholders, but has also caused the market to have new doubts about the food giant's strategic direction. Furthermore, the results of Moody's review may have an important impact on the company's financing costs and investor confidence, and the capital structure arrangement after the split is a core factor in determining the direction of its credit rating.