Events: KRFT Proxy Analysis June 2015

Kraft Foods Group

Events: Proxy Analysis

June 22, 2015


SUMMARY INFO

  • NASDAQ: KRFT
  • Recent PPS: $70.70 (Net of $16.50 special dividend)
  • Shares Out: 1,217 million
  • Market Cap: $86,042
  • Debt: $32,721 (Inclusive of BRK Preferred)
  • Cash: $1,540 (Non-Operating Cash On Hand)
  • Enterprise: $117,223

DISCUSSION

Running out of time this morning, so unfortunately not much detail here. I ran through the June Kraft Heinz merger proxy and have updated my IRR estimate for KRFT.

ANALYSIS

KRFT Proxy Analysis June 2015

Not entirely sure why this situation is so fascinating to me, but I keep going back to the ‘well’ here hoping to find a compelling investment. Although the updated 3-year IRR of ~15% is higher than my initial estimate of 10.3%, I still need a much lower price to consider it for investment, as the assumptions underlying the 15% IRR estimate are more than generous. Specifically I assume:

  • Terminal PE: 22.5X
  • Interest Rate: 4%
  • Tax Rate: 25%
  • Terminal EBITDAM: 30%

While upside potential to the 15% IRR estimate from higher medium term growth, higher synergies, and/or a highly accretive merger remains, I believe a 22.5X TPE is more than generous for a slow-growth Staple, and that medium-term growth is unlikely to surpass that of which both Companies (i.e. Kraft and Heinz) estimate in the proxy, as management projections tend to be overly optimistic. More than likely Kraft Heinz beats on merger synergies, in my opinion.

In any event, I need, at most, a $79 gross stock price to consider an investment. I will continue to monitor…

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7 thoughts on “Events: KRFT Proxy Analysis June 2015

  1. Good analysis- one question (and maybe I missed something)- are you being more conservative on you combined PF EBITDA? For example in 2018 if you include the $1.5bn in synergies I get the total combined EBITDA of $9,293mm ($7,793mm plus $1,500mm) not the $8,524mm you have.

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    • I am being conservative, BUT not as conservative as you think. Those projections were independently done by each Company, and both sets of projections show margin expansion – Kraft from 20% in 2015 to 22.5% in 2018; and Heinz from 29.7% in 2015 to 33.3% in 2018. The $1.5B synergy estimate likely incorporates a large chunk of those independent margin expansion targets. How much – I do not know; but likely not all of it, thus I believe I am conservative using the $1.5B synergy estimate thru 2018.

      That said however, I do assume PF Kraft Heinz terminally gets to 30%, which is above the $1.5B synergy-implied 2018 EBITDAM of 28.9%.

      Hope that helps!

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      • Very helpful! Heinz management says they see further expansion for their own margins so maybe 2018 margins above 30% and maybe 31% is not a bad assumption? They also do say that the projections exclude further cost savings initiatives.

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      • Could easily see 30% by 2018. Big question is how much of the cost cutting will be reinvested for growth. If they can get to 30% by ’18 inclusive of increment growth opex, that would be huge.

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