Following The Kraft Heinz Company's (KHC.US) announcement of its business separation plan, uncertainty surrounding the company's future capital structure has drawn significant market attention. International rating agency Moody's has placed the company on its credit rating downgrade watch list and initiated a comprehensive review of its investment-grade rating.
According to Moody's press release, the agency has placed Kraft Heinz's "Baa2" senior unsecured rating and "Prime-2" commercial paper rating on downgrade review, while adjusting the rating outlook for all affiliated entities from "stable" to "under review." Moody's noted that while the separation plan may enhance business focus, both new entities will need to continue managing their respective mature brand portfolios in the current environment of tightening consumer spending.
The separation plan disclosed by The Kraft Heinz Company on Tuesday reveals its intention to split operations into two independent companies, effectively unwinding the major merger transaction that helped establish the company as one of the world's largest packaged food sellers a decade ago. Under the plan, one company will focus on sauces, spreads, condiments, and shelf-stable foods, featuring brands including Heinz ketchup, Philadelphia cream cheese, and Kraft macaroni and cheese. The other company will concentrate on grocery business, encompassing brands such as Oscar Mayer ham, Kraft Singles cheese, and Lunchables children's lunch kits.
The company emphasized that both post-separation entities will maintain investment-grade credit profiles, with existing debt to be assumed by the newly formed Taste Elevation Co. or refinanced through new arrangements. Moody's review focuses on the implementation risks and potential benefits of the separation plan, including the operating prospects for Taste Elevation and the North American grocery business segment, as well as the final capital structure and financial policies.
The agency is particularly concerned about changes in Kraft Heinz's leverage ratio following the split, as the company plans to issue new debt to finance the North American grocery business and repay portions of existing debt. While preliminary assessments suggest both new companies may maintain relatively low leverage ratios below 3x, the specific debt structure and dividend policies have not been finalized.
Notably, this separation plan has sparked public dissatisfaction from the company's largest shareholder, Warren Buffett. As head of Berkshire Hathaway, which holds a 27.5% stake, Buffett expressed disappointment in interviews about the board proceeding with the split without consulting shareholders. The legendary investor stated clearly: "If someone were to make an offer to acquire our shares, we would not accept a joint acquisition offer unless other shareholders received the same terms. While merging Kraft and Heinz back then was certainly not a perfect decision, forcing a split now may not necessarily solve the problems."
This separation marks a substantial reversal of the 2015 industry-reshaping merger. That transaction, jointly orchestrated by Buffett's Berkshire Hathaway and 3G Capital, integrated Kraft and Heinz into the world's second-largest food enterprise, with former Kraft shareholders holding 49% and Heinz shareholders holding 51% after the merger.
The advancement of the current separation plan has not only triggered public questioning from the largest shareholder but also raised new market concerns about the food giant's strategic direction. Additionally, Moody's review results may significantly impact the company's financing costs and investor confidence, while the post-separation capital structure arrangements have become the core factor determining its credit rating trajectory.
