Last week’s $15 billion write down at packaged food giant Kraft Heinz no doubt came to as a surprise to the many followers of its two major owners: renowned investor Warren Buffett and 3G, the highly regarded Brazilian investment firm.
The duo is so legendary that in recent years hedge fund activists Bill Ackman and Dan Loeb separately looked to Kraft Heinz as a buyer for their target companies — Oreo maker Mondelez and soup maker Campbell’s, respectively.
But Kraft Heinz seems to have enough problems on its own, and it passed on both companies. Notably, Campbell’s stock slid 7 percent Friday on the Kraft Heinz news and is now down 2.21 percent for the year. Kraft Heinz slid 28 percent on Friday and is down more than 21 percent year to date.
Kraft Heinz is also facing an investigation from the Securities and Exchange Commission over accounting and other issues. The company said it is cooperating with the SEC probe and has made “certain improvements to its internal controls.” It also recorded a $25 million increase to costs as a result of the probe and a 36 percent cut in its dividend.
Despite its high-profile boosters, however, there’s at least one skeptic who called the alarm on Kraft almost a year ago: former hedge fund manager Enrique Abeyta. In a presentation made May 3, 2018, at a shorting conference run by Whitney Tilson’s Kase Learning, Abeyta warned investors about Kraft Heinz as well as another 3G investment, Anheuser Busch, which fell more than 3 percent on the Kraft Heinz news (it is down 30 percent over the past year). Abeyta recommended shorting both.
Short selling in both stocks remains minimal. Short interest is 3 percent of the float at Kraft Heinz and 0.33 percent at Anheuser Busch, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, a financial technology and analytics firm.
Abeyta, who founded two hedge funds — Stadia Capital and 360 Global Capital — and has focused on short selling for 25 years, says his views on the two companies remain the same today. He now runs a niche digital media company that focuses on heavy metal and hard rock, which he says has given him insight into the power of digital platforms on young consumers.
The Kraft Heinz news comes as consumer tastes have changed to fresh foods from the packaged goods the company offers — like Kraft’s Velveeta cheese or Oscar Meyer hot dogs — which forced Kraft Heinz to write down the value of those brands.
Abeyta points to something else at work: the ability of tech giants like Facebook, Instagram, and Amazon to alter the environment in shaping tastes and delivering products. If a person doesn’t spend at least an hour a day on these platforms, “you don’t fundamentally understand what is happening with the majority of young consumers today,” he warned investors last year.
“All of the legacy consumer product companies that have traditionally benefitted from scale are being — and will be further impacted — by the impact of technology on marketing, production and distribution which is allowing the market entry of 1,000s of competitive products,” he said in an email on Friday. “From here things will get much worse and perhaps not get any better.”
In his presentation last year, Abeyta cited the example of craft brewing, which has grown fourfold since 2008, the year 3G took control of Anheuser Busch InBev.
“It will be very difficult for them to buy their way out of it at this point outside of a few little deals here and there,” he said.
As for Kraft Heinz, another big threat is Amazon, whose purchase of Whole Foods now gives it a distribution channel. Kraft Heinz historically had a lock on grocery store aisles by buying shelf space, but Whole Foods and Amazon are chipping away at its dominance.
“What if Amazon gets that same access?” he asked in his presentation last year.
Moreover, he says the limits of the 3G financial engineering magic seem to have been reached.
“The worst positioned [consumer product companies] are those that took on a ‘private equity’ model predicated on high leverage, stable low growth and cost-cutting,” he wrote in the email to Institutional Investor. While cost cutting worked initially at Anheuser Busch, it has since been tapped out.
Jorge Paulo Lemann, the co-founder of 3G, has acknowledged the difficult issues facing the company, calling himself a “dinosaur” who is being “disrupted.”
But from now on, there’s little that Buffett or 3G can do to protect stockholders at companies like Kraft Heinz and Anheuser Busch, Abeyta says: “There is NO solution that doesn’t involve further pain for equity holders.”
