Kraft Heinz's Split Signals a New Era for Undervalued Consumer Conglomerates

The Kraft Heinz Company (KHC) is on the brink of a major transformation. The food giant plans to split into two entities—one focused on premium brands like Heinz ketchup and Grey Poupon, the other on processed foods such as Lunchables—a move aimed at unlocking shareholder value after years of stagnation. This strategic shift mirrors a broader trend in the consumer goods sector: conglomerates are breaking up to refocus on high-margin segments and eliminate "conglomerate discounts," where diversified firms trade below the sum of their parts. For investors, the question is clear: Could this split reignite value in undervalued conglomerates, and how should investors position themselves?

The Breakup Blueprint: Focus, Focus, Focus

Kraft Heinz's proposed split targets two core challenges: declining sales in commoditized processed foods and underperformance of its premium brands due to diluted focus. The premium division, housing brands like Heinz and Classico, could command a valuation of up to $20 billion, while the remaining company would manage lower-margin businesses like Kraft cheeses and Lunchables.

The company's stock, which has lost two-thirds of its value since the 2015 merger with 3G Capital, now trades at roughly 10x EV/EBITDA, significantly below peers like Unilever (UL) at 16x and McCormick (MKC) at 22x. The split aims to narrow this gap by streamlining operations and reducing its $21.6 billion debt burden—a critical step given that interest costs now eat into already pressured margins.

Historical Precedents: When Conglomerates Split, Value Follows

Kraft Heinz's move isn't unprecedented. Over the past decade, consumer goods giants have increasingly turned to spin-offs to unlock value, with mixed but often promising outcomes:

1. Johnson & Johnson (JNJ) & Kenvue (KVUE): In 2023, J&J spun off its consumer health division into Kenvue, creating a $42 billion standalone entity. Kenvue's brands (Listerine, Neutrogena) now trade independently, and its stock rose 20% post-split as investors welcomed the focus on high-margin consumer health.

2. GlaxoSmithKline (GSK) & Haleon (HLN): The 2022 spin-off of Haleon, GSK's $31 billion consumer healthcare division, allowed Haleon to pivot toward OTC brands like Sensodyne and Advil. Haleon's shares surged 25% in its first year, outperforming GSK's flat stock.

3. Vivendi's Deconglomeration: In 2024, Vivendi split into three entities: Louis Lafitte (holdings), Canal+ (media), and Havas (advertising). While Canal+'s shares initially fell 15%, the spin-off reduced Vivendi's debt and allowed Canal+ to focus on high-growth African markets, positioning it for long-term gains.

These cases highlight a pattern: spin-offs often eliminate conglomerate discounts by enabling subsidiaries to operate with sharper focus, clearer strategies, and better capital allocation.

Risks: Brand Fragmentation and Operational Hurdles

The path to value isn't without pitfalls. Key risks for Kraft Heinz include:
- Brand Fragmentation: Dividing brands could dilute marketing synergies. For example, Heinz ketchup's global reach relies on scale, while the processed foods division may struggle without shared R&D or distribution.
- Debt Drag: Even after the split, the combined entity's debt-to-EBITDA ratio remains a concern. If the premium division's margins don't offset interest costs, the plan could backfire.
- Market Skepticism: Investors may punish the company for perceived overvaluation of the premium division or execution risks. Post-split volatility is likely.

Investment Strategy: Target Undervalued Conglomerates with Split Potential

The Kraft Heinz breakup underscores a golden rule for consumer goods investors: focus on conglomerates trading at conglomerate discounts. Here's how to play it:

1. Buy the Split Candidates:
2. Unilever (UL): Despite its high valuation multiples, Unilever's diverse portfolio (Ben & Jerry's, Hellmann's) could face pressure to spin off underperforming divisions.
3. PepsiCo (PEP): While not undervalued, its recent divestiture of SodaStream hints at a trend toward pruning non-core assets to boost margins.

4. Pernod Ricard (RI): The French spirits giant could unlock value by spinning off its struggling wine division (Mumm, Jacob's Creek) to focus on premium spirits.

5. Look for Post-Spin Opportunities:

6. Canal+ (CAN+): Despite initial skepticism, its $4 billion valuation (12x EBITDA) offers a discount to peers like Discovery (DISCA). Its African expansion plans could drive upside.

7. Havas (HVS): The advertising arm of Vivendi now has the agility to compete with digital-first agencies, though its debt-heavy balance sheet poses risks.

8. Avoid Overpaying for the Next Split:

9. Wait for post-split volatility to buy into entities like Kenvue or Haleon at discounts. For example, Kenvue's stock dipped 10% in 2024 amid macroeconomic fears, creating a better entry point.

Final Take: A Necessary Evolution

Kraft Heinz's breakup is less about risk and more about survival. The consumer goods sector is undergoing a seismic shift: investors demand clarity, focus, and growth. For undervalued conglomerates, splitting may be the only way to avoid permanent discounts.

Investors should treat the breakup as a sign of things to come—more splits, more spin-offs, and a sector-wide push to prioritize core strengths over conglomerate complexity. The reward? A chance to buy high-quality brands at a discount—before the market catches on.

Action Items:
- Monitor KHC's split announcement and post-split performance.
- Build a portfolio of undervalued conglomerates with split potential (e.g., Pernod Ricard, Unilever).
- Avoid overpaying for recently split entities—wait for dips.

The consumer goods sector is entering a new era. The question isn't whether conglomerates will break up—it's who will act first, and who will profit most.

Data as of July 2025. Past performance does not guarantee future results.