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Kraft Heinz cuts the cheese in two, plots new capital structures
William Hoffman
•4 min read
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After a 10-year marriage, Kraft Heinz is separating its shelf-stable condiments from its frozen and refrigerated meals in order to unlock growth from the less complex product bases.
That growth is nice for equity investors (at least in theory) but what does it mean for holders of the company’s $21bn debt stack?
The better performing entity is expected to house the existing debt, according to prepared remarks released ahead of a public presentation to investors. That unit is temporarily named “Global Taste Elevation” and includes Heinz, Philadelphia and Kraft Mac & Cheese brands.
New debt is also expected to be issued out of the lower performing “North American Grocery Co.,” which includes brands such as Oscar Myer, Kraft Singles, Lunchables, Ore-Ida, Capri-Sun and Maxwell House.
Via Kraft Heinz
Management is guiding that both entities will have investment grade ratings, but the exact breakdown of the capital structures is yet to be determined.
“We will be working with the rating agencies as well to ensure that we allocate that [debt] and give a capital structure that will set both companies up for success, and both companies have flexibility to deploy cash in different ways,” Andre Maciel, global chief financial officer of Kraft Heinz, said during an investor Q&A this week. “I think by saying that we're targeting both companies to be investment grade, that should give you a decent sense of the amount of debt that each entity could eventually have.”
Let’s do some math
Based on 2024 adjusted EBITDA of $6.3bn, Kraft Heinz reported total debt/EBITDA of around 3.36x. The company also held $1.5bn of cash and cash equivalents on its balance sheet as of June, but it’s unclear how that would split between the two entities.
If the Global Taste Elevation division takes on all of the existing debt, it won’t be able to maintain its mid triple-B ratings from S&P, Moody’s and Fitch, of which the last two placed the company on watch for a downgrade this week.
Global Taste Elevation is expected to generate around $4bn of adjusted EBITDA based on 2024 financials, which would place total leverage at 5.3x if it took on all of Kraft Heinz’s $21bn of existing debt.
In order to get down to below 4x total debt, which is the level where S&P said it would likely maintain its rating, the Global Taste Elevation business would likely have to reduce debt by around $5bn or rapidly grow its EBITDA.
Debt reduction is very achievable if the company refinances some $5.4bn of Kraft Heinz debt coming due from 2026 to 2030 into North American Grocery Co., as some sources have suggested.
“There’s not enough detail to be sure how the debt would be split up, however we know there will be some refinancing of existing debt into the new entity debt so that’s something we have on our radar,” one buysider said.
One banker said they expect the Grocery segment will issue debt and dividend the proceeds back to the Taste Elevation segment in order to pay down existing notes closer to the back half of 2026 when this transaction is expected to close.
The grocery segment is expected to generate some $2.3bn of adjusted EBITDA based on 2024 financials, and the segment can keep around $8bn of debt on its balance sheet while maintaining total leverage in the low 3x area.
Kraft Heinz is just the latest in a string of corporate breakups in the consumer food and beverage space.
It started when the Kellogg Company split into two back in 2023. The snacking business became Kellanova and was sold to competitor Mars a year later. The cereal business became WK Kellogg and was acquired by Ferrero earlier this year.
Just last month, Keurig Dr Pepper announced it is buying JDE Peet’s and subsequently splitting into beverage and coffee divisions. We wrote about the debt implications here.
PepsiCo may also be shaking things up after activist Elliott Investment Management took a $4bn stake in the company this week urging it to refranchise its company-owned bottling network and to divest certain underperforming assets. But PepsiCo has also been acquisitive lately buying prebiotic soda brand Poppi in May as well as Mexican-American snack brand Siete Foods in January.
While investors and bankers alike are eager to see more M&A activity, these kinds of divestitures may not translate into much new bond supply.
“My gut tells me that, generally speaking, on those transactions they're not significant needle movers of more borrowing,” one banker said. “You get some liability management on one side, and you get what I would call a strategic issuance on the other to fund that liability management.”
