Over Warren Buffett's Objections, Kraft Heinz Is Planning to Break Up. Will the Bold Move Pay Off for the Struggling Stock?

Key Points

• Buffett and Berkshire helped orchestrate the merger of Kraft and Heinz in 2015, but the stock has performed terribly since then.

• Kraft Heinz is planning to split its condiments and sauces business from its North American grocer division.

• In a rare public repudiation, Buffett went on CNBC and called the split "disappointing."

• 10 stocks we like better than Kraft Heinz ›

In a move that many thought could be coming, Kraft Heinz's (NASDAQ: KHC) management team has chosen to split into two. One company, Global Taste Elevation Co., will comprise the faster-growing sauces and condiments products. The other company, North American Grocery Co., will house the North American grocery business.

The move comes after shares of Kraft Heinz have struggled immensely, down over 22% in the past five years. Shifting consumer preferences into healthier foods have challenged Kraft Heinz's core business, while the company has also been working to lower its high debt load.

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Following the announcement of the split, Warren Buffett, CEO of Berkshire Hathaway, the largest shareholder of Kraft Heinz, told CNBC that he is "disappointed" by the strategic move. Given Buffett's stature in the stock market, it's not easy for a company to go against the Oracle of Omaha, especially when Berkshire is the largest shareholder. Will the bold move pay off for Kraft Heinz?

Buffett is not pleased

Buffett and Berkshire essentially created the Kraft Heinz company we know today. In 2013, Berkshire teamed up with Brazilian private equity firm 3G to purchase Heinz in a deal valued at $28 billion, which included assumption of the company's debt. Two years later, Berkshire and 3G again worked together to merge the company with Kraft.

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Berkshire is the largest shareholder today, owning 27.5% of outstanding shares. However, it's clear Buffett and Berkshire are not happy with the decision to split into two, citing the $300 million in expenses to split the company, the year it will take to complete the transaction, and the fact that shareholders did not get a vote on the decision.

Perhaps Buffett saw this coming, as Berkshire earlier this year gave up its two seats on Kraft Heinz's board of directors and marked down the position in the second quarter, indicating Berkshire may look to unwind its position. Berkshire's incoming CEO Greg Abel reportedly met with Kraft Heinz management about a week before the split announcement and voiced his displeasure with the idea.

Despite clear frustration, Buffett also told CNBC that it would not accept a block bid for its shares unless the same deal was offered to other shareholders.

Although Berkshire is clearly not happy, their decision to merge Kraft and Heinz has been a dud. Shares are down around 70% since the deal closed in 2015.

Aiming to give growth a better runway

The two new companies will be one focused on global taste innovation and North American Grocery. The global taste company will house faster-growing brands like Heinz, Philadelphia Cream Cheese, and Kraft Mac & Cheese. In 2024, these companies generated net sales of $15.4 billion and adjusted earnings before interest, taxes, depreciation, and amoritization (EBITDA) of $4 billion. The idea will be to maximize high-margin growth and leading market share.

The North American grocer business will include brands like Oscar Mayer, Kraft Singles, Lunchables, Capri Sun, and Maxwell Coffee. In 2024, these businesses generated about $10.4 billion of sales and adjusted EBITDA of $2.3 billion. Management wants the grocer business to focus on reliable free cash flow generation via operational efficiency through stable brands.

Part of Kraft Heinz's issue has been that it operates so many different food brands, forcing the company to compete in many different consumer staple subcategories, which has made it difficult for the company to really focus and deliver strong market share in a number of categories. With two separate entities, this will change, according to Kraft Heinz's management team from the presentation explaining the decision:

... Separating into two independent, publicly traded companies will allow both companies to dedicate the right level of attention and resources to all areas of the business, improve execution, create better aligned incentives, and enable our iconic brands to reach their full potential. We will also be able to reduce operational complexity and tailor operating models, driving further efficiencies and industry-leading margins.

As mentioned, the split will result in $300 million of "dis-synergies." The split is expected to close in the second half of 2026. Kraft Heinz's high 6%-plus dividend yield is expected to be maintained in aggregate at inception, although the capital structures of each company including reallocation of the debt has yet to be determined.

Can it work?

There are still a lot of unknowns here, including how the debt will be reallocated and whether either company can achieve the desired growth. It's also possible that the faster-growing Global Taste Elevation business draws the majority of investor interest. I also wonder whether the bulk of the dividends will eventually be allocated to the grocer business to draw more dividend investors, and then have the taste business pay fewer dividends and focus on growth and appreciation.

Buffett and Berkshire have acknowledged that they made mistakes in the past with Kraft Heinz, but despite the stock's wretched performance, Berkshire hasn't bought or sold a share since 2015.

It's too hard to make a real call at this point because it's largely a show-me story right now. The good news is that investors should be able to ride out the high dividend until at least the split happens next year. The bad news is the company has lost the support of Berkshire, which the market holds in high regard.

Even if Kraft Heinz's plan does work, this investment is for patient, long-term investors. It certainly won't happen overnight.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.