Events: Kraft Foods Group Merger Analysis March 2015

Kraft Foods Group (NASDAQ: KRFT)

Events: Merger Analysis

March 25, 2015


SUMMARY INFO

  • Recent PPS: $84
  • FD Shares Out: 606.1 million
  • Market Cap: $50.91B
  • Enterprise: $59.65B

DEAL OVERVIEW

  • 3G/Berkshire-owned Heinz will merge with KRFT to form the Kraft Heinz Company
  • KRFT shareholders will own 49% of NewCo and receive a $16.50 per special dividend
  • $10B special dividend funded entirely with 3G and Berkshire equity
  • $1.5B projected synergies to be achieved by FYE 2017
  • NewCo will maintain the KRFT dividend of $2.20 per share

2014 PRO FORMA FINANCIALS

(Assumes $1.5B synergy target, 4% interest rate and 35% tax rate.)

  • Revenue: $29,127
  • Adj. EBITDA: $7,956 (27.3%)
  • Adj. EBIT: $7,021
  • Net Income: $3,948 (13.6% NPM)
  • Debt: $23,687
  • Net Debt: $20,095
  • Leverage: 2.5X
  • Shares: 1,237

3-YEAR IRR ANALYSIS

(Please see attached model for details.)

Assuming a 4% top-line growth rate and and a constant 13.6% Pro Forma NPM, NewCo’s 2018E EPS is $3.73. At a 22.5X PE, the FYE 2017 target price is $84. After backing out the $16.50 special dividend from KRFT’s pre-market trading price of $84 and factoring in 2.75 years of KRFT-level dividends, the 3-year IRR from $84 is 10.3% per annum. If NewCo recaps at 4 times 2018 EBITDA, the 3-year IRR rises to 12.7% per annum.

I believe I am generous with a 22.5X multiple for FYE 2017. Typically I would use 20X, but given the M&A optionality the Kraft Heinz platform will bring, a slight premium is warranted. In any event, at least pre-market the market appears to have this deal buttoned up from an “efficient market” standpoint.

I would look to establish a position around $69, which would yield a 3-year IRR of approximately 20% per annum.

 

KEY DOCUMENTS/LINKS

KRFT Merger Analysis March 2015

Press Release

Heinz SEC Filings

KRFT 2014 10K

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