The Consumer Retail and Real Estate division presents the following article which aims to better comprehend the recently announced agreement between two prominent players in the food and beverage industry: Kraft-Heinz and Parmalat. On the 6th of November 2018, the Italian multinational dairy and food corporation, Parmalat, definitively agreed to acquire Kraft-Heinz’s Canadian natural cheese division for $1.62 billion CAD. The deal is expected to close in the first half of 2019, subject to regulatory review.
The article begins by outlining the background and core business of Kraft-Heinz and Parmalat; following which, it goes on to describe the industry context, considering recent trends and providing possible explanations. Concluding the article is a brief outline of the deal structure and the rationale behind the agreement.
Kraft-Heinz
Kraft-Heinz is a multinational company covering the food and beverage sector with a vast range of brands, including: Kraft, Heinz, ABC and Plasmon. It was formed in 2015 out of a merger between the US-based food conglomerates, Kraft and Heinz. The 2017 financial results count €6.9 billion in revenue and €2,015 million in EBITDA, up 4% compared with the previous year. EBITDA increased primarily due to gains from cost savings initiatives and lower overhead costs, which were partially offset by higher input costs. The business is regionally divided, and the subject of the aforementioned acquisition is Kraft-Heinz Canada; in particular, the natural cheese business, including the brands: Amooza, P’tit Quebec and Cracker Barrel. This year, the Canadian division of the company contributed 8.6% – $591 million USD – to the total annual revenue of $6877 million USD, experiencing negative growth compared with the previous year.
Parmalat
Parmalat, founded in 1961 in Parma, Italy, and headquartered in Collecchio, Italy, is a leader in the milk and milk derivatives industry owning more than 60 production sites. In 2003, Parmalat was declared bankrupt owing to a significant financial breakdown that involved most of the companies within the group, forcing it to sell some brands and activities in order to restore its initial value. The bankruptcy remains the largest in European history, with debts amounting to €14.3 billion. Since 2011 the company has been controlled by France-based Lactalis and today it operates worldwide with circa. 26,000 employees, €6.6 billion in revenue and €103 million in EBITDA. One of Parmalat’s strongest attributes lies in its distribution channels, allowing the company to extend its reach to more than 20 million families in Italy alone, and around 200 million consumers worldwide.
Food and Beverage Industry Overview
Kraft-Heinz and Parmalat are prominent players in the food and beverage industry, in particular the market segment relating to the production of edible goods. The key companies and competitors in the food industry are Nestle, Danone and Mondelez international, whilst the beverage industry is dominated by PepsiCo, Coca-Cola and Anheuser-Busch InBev. To a certain extent it can be considered an oligopolistic market, where many brands are owned by a small number of large conglomerates. Therefore, the profit margins are small, and competition is tough. The current industry trends are shaped by these issues. Notably, consumer taste and preferences have shifted significantly, insofar as they are now looking for cheaper and healthier alternatives. Moreover, consumers are increasingly aware of food sustainability and corporate responsibility and the significant growth of the US farmer markets showcases this trend. To counter these trends, large conglomerates have realised the necessity to continuously improve their products and comply with the increasingly complex regulations. However, creating new products increases Research & Development costs, which further affects their small profit margins. They instead acquire businesses that are producing the type of foods that they are looking for, focusing largely on local brands. Currently, this is the most efficient way to get ahead of the competition in the industry, allowing the conglomerates to reduce both development and production costs, whilst simultaneously tackling the problem of changing consumer tastes. Furthermore, they maintain and acquire additional customers through these established brands. Thus, the conglomerates can separate themselves from others and increase their reputation via the elaborate marketing procedures of these brands.
Deal Structure and Rationale
On the 6th of November 2018, Parmalat definitively agreed to acquire Kraft-Heinz Company’s Canadian natural cheese division for $1.62 billion CAD. The transaction includes Parmalat’s purchase of natural cheese brands Amooza, P’tit Quebec and Cracker Barrel in the Canadian market, as well as Kraft-Heinz’ manufacturing plant in Ingleside, Ont., allowing Parmalat to further expand its current network of 16 Canadian subsidiary manufacturing facilities. The deal is expected to close in the first half of 2019, subject to regulatory review by the Canadian Competition Bureau. As of the time of publishing, the only publicly available information on the deal consolidation is that it will be financed through a combination of internal resources and debt.
Bernardo Hees, CEO of Kraft-Heinz, said in a statement that Parmalat is “Uniquely positioned to advance the natural cheese business” due to their specific focus on the dairy industry, allowing them to improve efficiency through the greater utilisation of the dairy products Parmalat already produce. However, Kraft Heinz will continue to market their other cheese brands, including: Philadelphia, Cheez Whiz and Kraft Singles, which are processed at their plant in Mount Royal, Quebec, and for which Kraft -Heinz have stronger brand equity and competitive advantage. Further, Parmalat has suggested that the addition of Kraft-Heinz products could create a more efficient distribution and supply chain for dairy products. Thereby protecting Canadian jobs and farm incomes in the long-run, given their growth potential. This fits in with Parmalat’s ambition to have a more significant economic and social contribution in Canada.
Kraft-Heinz is hoping to use the proceeds of the transaction to pay down debt. In 2017, Kraft Heinz’ natural cheese division contributed roughly $560 million CAD to the company’s net sales; however, reduced interest expenses are expected to offset the majority of earnings per share dilution on a run-rate basis.
Fasken Martineau DuMoulin LLP and RBC Capital Markets served Kraft-Heinz as legal and financial advisors, respectively, while Parmalat has been advised by Lazard.
Sources and References: Newswire CA; Reuters; Parmalat website; Kraft-Heinz website; Cision; Business Wire; financecommunity.it
To contact the authors:
Sammy Scane sammy.scane@hotmail.co.uk
Katharina Brenninkmeyer katharina.brenninkmeyer@studbocconi.it
Martina Bonzano martina.bonzano@studbocconi.it
Kristof Seres kristof.seres@studbocconi.it
Bocconi Students M&A Circle 
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