What Kraft Heinz Could Sell Oscar Mayer Means for Investors

My bologna has a name. It’s OSCAR…

We all know the famous Oscar Mayer song. But there’s more to this brand than bologna. We also offer hot dogs, bacon, cold cuts, and scrambler breakfast bowls available to-go. The brand changed hands several times over the past 40 years, eventually becoming its own. kraft heinz (KHC -0.19%) Umbrella when Kraft and Heinz merged in 2015.

Oscar Mayer may be changing hands again. According to wall street journal, Kraft Heinz hired a financial expert to determine if there was interest in purchasing the brand. If all goes well, the company hopes to make $3 billion to $5 billion from the sale of Oscar Mayer.

Should shareholders be satisfied with the results? Here are a few things investors need to know:

What would Kraft Heinz be like without Oscar Mayer?

Unfortunately, Kraft Heinz does not disclose the financial results of its Oscar Mayer brand. However, investors should consider that there are many food stocks: Hormel, conagraEven Kraft Heinz itself typically trades on the stock market at 1 to 2 times trailing sales.

Perhaps Oscar Mayer will get a bit of a premium for the acquisition. Flip this equation around and an acquisition for between $3 billion and $5 billion would result in annual sales of around $2 billion to $2.5 billion.

A look at Kraft Heinz’s annual report shows that this is the correct range. The company has total net sales of $27 billion in 2023. Of this total, 9% ($2.4 billion) was in the meat and seafood sector. And Oscar Mayer is a major contributor to the meat business.

Food companies also typically have relatively low profit margins. Assuming Oscar Mayer’s profit margins are approximately 5%, annual profits would range from $100 million to $125 million.

On the one hand, Kraft Heinz would be a smaller company without Oscar Mayer, which could see its market capitalization drop by $44 billion. But on the other hand, some parts of the business with low growth prospects may receive a large one-time payout.

Would this be a good move for Kraft Heinz?

It’s impossible to say whether it would be a good move for Kraft Heinz to sell Oscar Mayer, as it would depend entirely on how management used the windfall payday. And since it’s still in the rumor stage, executives haven’t revealed their plans yet.

But it could definitely be a good move. As of the first quarter of 2024, Kraft Heinz had nearly $20 billion in long-term debt. That’s a huge amount, putting the company’s interest expense in 2023 at over $900 million. Selling Oscar Mayer to reduce its debt could help it generate higher profits. Because it takes less money to pay off your debt.

This is just one example of how Kraft Heinz can use a one-time payday to improve its business for its shareholders. But looking at it from a more skeptical perspective, if the numbers are anything like my guess, it’s hard to see how selling Oscar Mayer would harm the company.

Even if Kraft Heinz pays a special dividend or uses the proceeds to buy back shares, it could be a favorable outcome for shareholders. It may not advance the company in the long run, but it won’t necessarily harm shareholders.

One of the only ways it could be a downright bad move is if Kraft Heinz used that money to buy an inferior business. That happens. Companies can and do make bad acquisitions. If that were to happen, it would be something for investors to consider.

Selling Oscar Mayer wouldn’t necessarily be a game-changing move for Kraft Heinz. However, this can be a good first step towards improving your business. And if management uses that money to do other good things, perhaps this stock will start to perform better after years of lackluster returns.