If it gets a good price, it could be a move that’s hard to mess up.
My bologna has a first name, it’s O-S-C-A-R…
We all recognize the famous Oscar Mayer jingle. But the brand has much more than bologna. It also has hot dogs, bacon, cold cuts, and its grab-and-go Scrambler breakfast bowls. The brand has changed hands several times in the last 40 years, ultimately coming under the Kraft Heinz (KHC -0.19%) umbrella when Kraft and Heinz merged in 2015.
Oscar Mayer may be about to change hands again. According to The Wall Street Journal, Kraft Heinz has hired financial professionals to see if there’s any interest in buying the brand. If things go well, the company hopes to make between $3 billion and $5 billion by offloading Oscar Mayer.
Should shareholders be happy with that outcome? Here are some things that investors need to know.
What Kraft Heinz could look like without Oscar Mayer
Unfortunately, Kraft Heinz doesn’t break out financial results for its Oscar Mayer brand. But investors should consider that many food stocks such as Hormel, Conagra, and even Kraft Heinz itself typically trade on the stock market for between one and two times trailing sales.
Perhaps Oscar Mayer would get a slight premium to that in a buyout. By reversing this equation, if it gets acquired between $3 billion and $5 billion, this would place its annual sales somewhere in the neighborhood of $2.0 billion to $2.5 billion.
Looking at the annual report for Kraft Heinz suggests this is the right range. The company had $27 billion in total net sales in 2023. Of this total, 9% ($2.4 billion) was in the meats and seafood category. And Oscar Mayer is a major contributor to its meat business.
Food companies usually have relatively low profit margins as well. Assuming Oscar Mayer had a profit margin around 5%, its annual profits would be in the ballpark of $100 million to $125 million.
On the one hand, Kraft Heinz would be a smaller company without Oscar Mayer, so its market capitalization of $44 billion could go down. But on the other hand, it could get a big one-time payday from a part of the business with low prospects for growth.
Would it be a good move for Kraft Heinz?
It’s impossible to say whether or not it would be a good move for Kraft Heinz to sell Oscar Mayer because it depends entirely on how management used its windfall payday. And since this is still in the rumor stage, management hasn’t unveiled a plan yet.
However, it certainly could be a good move. As of the first quarter of 2024, Kraft Heinz had nearly $20 billion in long-term debt — an exorbitant amount that cost the company over $900 million in interest expenses in 2023. Reducing its debt by selling Oscar Mayer could help unlock higher profits for shareholders, since less money would be needed to service debt.
This is just one example of how Kraft Heinz could use a one-time payday to improve its business for shareholders. But thinking about things from a more skeptical viewpoint, it’s hard to see how selling Oscar Mayer would hurt the company if the numbers are anything close to my guesses here.
Even if Kraft Heinz paid a special dividend or used the proceeds to repurchase shares, it could be a favorable outcome for shareholders. It perhaps wouldn’t boost the company over the long term, but it wouldn’t necessarily hurt shareholders.
One of the only ways it could be an outright bad move would be if Kraft Heinz used the money to buy an inferior business. That happens — companies can and do make bad acquisitions. It would just be something that investors would need to think about if it ever came to that.
Selling Oscar Mayer wouldn’t necessarily be a game-changing move for Kraft Heinz. But it could be a good first step to improving the business. And if management uses the money to take other good steps, then perhaps this stock will start performing better after years of lackluster returns.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.