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BMO Capital Downgrades Kraft Foods Amid Concerns Over Strategic Initiatives

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BMO Capital on Thursday downgraded Kraft Foods Group Inc. (NASDAQ: KRFT) from Outperform to Market Perform after the announcement of a merger with privately owned Heinz, and raised its price target from $69 to $88.

Analysts Ken Zaslow and Patrick Chen wrote, "despite management's caution of overachieving the $1.5 billion in synergies, management's track record creates a high probability of exceeding its target, though it likely will be priced into the stock quickly.... we gain confidence in management's ability to achieve its target synergy as Heinz leveraged zero-based budgeting and supply chain consolidation to expand EBITDA margin 800 basis points to 26 percent in 2014…, we need to further assess the company's surprising strategy to reinvest a portion of its cost savings into growth initiatives, particularly given the challenging operating conditions and the timeline associated with regaining licenses."

The merger between the two companies has two specific aspects:

  1. Berkshire Hathaway and 3G invested $10 billion (split 50/50) to be deployed to a $16.50 special dividend for Kraft Foods shareholders.
  2. 3G and Berkshire Hathaway will own 51 percent of the company. Kraft-Heinz will be run by current Heinz CEO Bernardo Hees.

Hees outlined that he is committed to uphold Kraft's current dividend policy and reduce cash interest by refinancing $9.5 billion of existing Heinz high-yield debt to investment grade. There will also be a new Board of Directors consisting of five members from Kraft Foods.

Shares of Kraft Foods closed Wednesday at $83.17.

Latest Ratings for KRFT

DateFirmActionFromTo
Apr 2015Stifel NicolausMaintainsBuy
Mar 2015CitigroupMaintainsSell
Mar 2015Canaccord GenuityUpgradesHoldBuy

View More Analyst Ratings for KRFT
View the Latest Analyst Ratings

Posted-In: BMO Capital Markets Kenneth Zaslow Patrick ChenAnalyst Color Downgrades Price Target Analyst Ratings

 

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