Increment in Kraft Foods (NASDAQ:KRFT) Target Price Due to its Merger with H.J. Heinz (NYSE:HNZ)


According to the latest news, an analyst at Citi Research has increased the target price for Kraft Foods Group Inc. (NASDAQ:KRFT) by quite a margin; to $80 from its previous figure of $58. The firm, however, has maintained its Sell rating on the company’s stock. This significant increment has been made as a result of the merger between Kraft Foods (NASDAQ:KRFT) and H.J. Heinz (NYSE:HNZ).

The news of the merger was announced on Wednesday and is expected to make the two company’s collaboration into becoming the third biggest food and beverage company in US and fifth largest in the world. The current chairman of Heinz (NYSE:HNZ) Alex Behring will head the collaboration, and Kraft’s (NASDAQ:KRFT) CEO John Cahill will take the position of vice chairman.

The announcement left several ambiguities in its wake, with no information about revenue and margin guidance, and pro forma interest expense. In addition, the merged company’s tax rates were also not available. Apart from that, not much was revealed about the probability of revenue collaboration as well as information on savings with regards to the Heinz’ (NYSE:HNZ) 3G deal.

Several research firms have kept both the companies under the radar since the merger announcement was made. According to the estimates provided by Citi Research firm, the potential figures for pro forma earnings before taxes, interest and EBITDA have been reduced. The price target however has been raised, which also includes $16.5 for dividend.

The valuation and estimates posted by Citi Research have been based on EBITDA estimates for 2018. The analysts at the firm believe that the merged company will capture collaborative run-rate cost for a year. Furthermore, the firm has also presented estimates and probabilities based on the valuation of the company at the time of the synergy. It has been calculated that Heinz (NYSE:HNZ) has captured EBITDA multiple that was at 33% premium to Kraft multiple. These figures have been reached in consideration of the historical data of Heinz (NYSE:HNZ). The analysts have also raised an eyebrow over the fact that the valuation for Heinz (NYSE:HNZ) is higher than that of Kraft’s (NASDAQ:KRFT), even though the latter is considered major source for saving. They further suggest that the high valuation is probably due to 3G warrant.

Kraft (NASDAQ:KRFT) is also an underperformer when considering selling, general and administration expenses (SG&A), exclusive of costs for advertisements in the synergy. When compared with Heinz’ (NYSE:HNZ) 2014 SG&A of 15% of sales, Kraft’s (NASDAQ:KRFT) came in at 10% of sales.

In view of the dip in Heinz’ (NYSE:HNZ) US volumes by 13%, analysts are wondering whether Kraft’s (NASDAQ:KRFT) revenue and volume are also headed to a decline as a result of the 3G’s implementation of zero based budgeting (ZBB). It has also been reported that 3G warrant holds a lot of potential in terms of further opportunities.

The price target has been increased to $80, with rating persistent at Sell as analysts believe that the first quarter results will reveal more to strengthen future estimates. The merger is also likely to get affected by forex exchange risks.

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