Kraft Heinz Faces Moody's Downgrade Watch Amid Split Plan

Kraft Heinz Company (KHC.US) has announced a plan to split its business, which has raised concerns about the company's future capital structure. This uncertainty has drawn the attention of the market, and international credit rating agency Moody's has placed the company on a credit rating downgrade watchlist. Moody's has initiated a comprehensive review of Kraft Heinz's investment-grade rating.

According to Moody's, the company's "Baa2" senior unsecured rating and "Prime-2" commercial paper rating have been placed on a downgrade watchlist. The outlook for all related entities has been adjusted from "stable" to "under review."

Moody's noted that while the split could enhance business focus, the two new entities will still need to manage their mature brands in a market environment where consumer spending is tightening. The split plan, revealed on Tuesday, involves dividing the business into two independent companies. This move effectively reverses a significant merger that took place a decade ago, which made Kraft Heinz one of the largest packaged food sellers globally.

One of the new companies will focus on condiments, spreads, seasonings, and long-shelf-life food products, including iconic brands like Heinz Tomato Ketchup, Philadelphia Cream Cheese, and Kraft Macaroni & Cheese. The other company will concentrate on grocery products, owning brands such as Oscar Mayer, Kraft Singles, and Lunchables.

The company has assured that both new entities will maintain investment-grade credit quality, with existing debt to be assumed or refinanced by the newly formed Taste Elevation Co.

Moody's review will cover the risks and potential benefits of the split, including the operational outlook for Taste Elevation and the North American grocery business segment, as well as the final capital structure and financial policies. The agency is particularly focused on changes in Kraft Heinz's leverage ratio post-split, as the company plans to issue new debt to finance the North American grocery business and repay some existing debt. Although preliminary assessments suggest that the leverage ratio for both new companies may remain below 3x, the specific debt structure and dividend policy have not been finalized.

Notably, the split plan has drawn public disapproval from the company's largest shareholder. The shareholder, who holds a 27.5% stake, expressed disappointment that the board did not consult shareholders before proceeding with the split. The shareholder emphasized that if an offer to acquire shares is made, it would not accept a joint acquisition proposal unless other shareholders receive the same terms. The shareholder also noted that while the merger of Kraft and Heinz was not a perfect decision, the current forced split may not solve existing problems.

This split marks a significant reversal of the 2015 merger, which was orchestrated by the shareholder's company and 3G Capital. The merger combined Kraft and Heinz into the world's second-largest food company, with original Kraft shareholders holding 49% of the stock and Heinz shareholders holding 51%.

The progress of the split plan has not only sparked public criticism from the largest shareholder but has also raised new doubts about the strategic direction of this food giant. Additionally, the outcome of Moody's review could significantly impact the company's financing costs and investor confidence. The capital structure arrangements post-split will be a crucial factor in determining the direction of its credit rating.