Warren Buffett and private-equity firm 3G Capital announced the merger between their H.J. Heinz business and Kraft Foods on Wednesday.
In a note ahead of the official announcement, but following reports of a potential deal between Kraft and 3G, Citi analysts highlighted some of the reasons why they had rated Kraft Foods a “Sell.”
The company’s biggest risks are:
- Market share is falling in categories that represent over 65% of sales.
- Volumes are declining.
- There’s no apparent strategy to enter the growing organic/natural foods category.
- The stock is expensive.
- Kraft’s earnings per share could fall by as much as 70c in 2015, and the analysts expect flat year-over-year EPS in 2015.
Citi added that:
In our opinion, if there is a deal, it must be centered on a dramatic cost cutting opportunity as the potential valuation looks extremely lofty. To a degree, Kraft’s vast center of the store portfolio could help 3G’s Heinz better leverage costs and generate synergies. Moreover, within the current Kraft business there still is an opportunity improve productivity and streamline costs to transform it into a low cost producer.
And as Business Insider’s Sam Ro noted on Wednesday, there is a “significant synergy potential” in the deal, which could make some employees nervous.
Kraft shares surged by as much as 39% in trading on Wednesday.