Who really benefits from the Kraft Heinz meltdown? It’s Warren Buffett and the Brazilians reaping all those dividends

Kraft Heinz’s $15 billion write-down in the face of disappointing profits and prospects last week looks at first like a fat embarrassing loss for the buy-em, whack-em-back school of corporate raiders.

The folks who built the Kraft Heinz conglomeration rammed together hundreds of aging fatty-salty-sweet convenience-food brands -- Oscar Mayer meat cylinders, Heinz Ketchup, and our regional spreadables Cheez Whiz and Philly cream cheese -- while closing 17 factories and cutting 13,000 jobs (a quarter of the former workforce) and collecting more than $5 billion in income-tax benefits.

Result: Sales and profits are down, not up. Isn’t that, as the Wall Street Journal called it, a “failure”?

Maybe not. If you count the cash flowing out of this company since pickles moved in with processed cheese, it looks like this deal is right on plan -- at least for the billionaire investors who benefit.

There are signs -- billions of them -- that this company hasn’t crashed off the profit highway. It’s actually doing pretty much what its majority owners -- folksy former richest-man-in-the-world Warren Buffett and his friends at 3G, the Brazilian hedge fund that brings you Budweiser beer and Burger King -- built it to do: make it easier for them to remove larger quantities of cash from an aging industry that they see little point in heroically propping up.

It’s not much comfort to small shareholders, customers, or workers whom the company leaves behind. But don’t cry for the deal-makers up on top of Kraft Heinz: They’re getting theirs.

To be sure, Buffett’s company, Berkshire Hathaway, a hedge fund wrapped in an insurance company (which helps cut taxes), wrote down $3 billion of its nearly $10 billion investment in Kraft Heinz last week, after the year-end numbers came in.

Kraft Heinz even cut its quarterly dividend, to 40 cents a share per quarter, from 62½ cents last year. That will be felt by dividend-seeking owners, who look forward to getting paid every three months.

But this dividend trim arrives only after Kraft Heinz already paid out more than $14 billion in dividends to common shareholders since the billionaires got involved -- more than half of that split between Buffett’s company, which controls more than a quarter of Kraft Heinz stock, and 3G, which owns almost as much.

Plus, Berkshire Hathaway collected an extra $2.3 billion in exchange for parking $8 billion in company funds in Kraft Heinz preferred stock for three years. When the company finally paid Buffett back, it did so with money borrowed from banks, adding to its long-term debt, which has grown to more than $25 billion from less than $20 billion at the merger.

All those dividend payments “have a negative impact on our results of operations,” Kraft Heinz acknowledged to the Securities and Exchange Commission. The company also noted that Buffett and 3G continued to enjoy “substantial control” over the company -- “and may have conflicts of interests,” since what’s best for them as controlling owners isn’t the same as what’s good for Kraft Heinz as a whole.

Despite last week’s write-down, Buffett and the Brazilians still control Kraft Heinz, its remaining 80 factories (half of them outside the U.S.) and hundreds of brands. Their managers told investors they see no reason to change their plans to keep looking for more food brands to consolidate. The owners may end up collecting billions more, if they can find acquisitions, sell off less attractive pieces, or belatedly make their cost-cutting pay off more than it has so far.

Buffett did acknowledge to TV network CNBC that he had “overpaid” for Kraft Heinz. But he added that he has no plans to accept his paper losses and sell out at last week’s reduced share price. That’s consistent with what Buffett said when he bought Heinz and Kraft: He planned to hold them long-term, and enjoy the cash flow, while angling for bigger deals.

Wall Street stock-watchers who initially cheered Kraft Heinz cuts aren’t applauding.

“Flat, shrunk, and levered is no way to go through life,” Ken Goldman wrote in a report to clients of J.P. Morgan, linking the food giant to Flounder, the “fat, drunk and stupid” undergrad facing expulsion in the movie Animal House.

Kraft Heinz profits and revenues haven’t risen, as promised -- they have instead declined since Buffett and the Brazilians bought in, Goldman noted. Despite factory consolidations and expense cuts, the company’s profit margin -- formerly 70 percent higher than rivals -- has eroded, while its debt and debt-to-profit ratio has “ballooned.” He urged clients to stop buying the stock, and cut his share price target to just $37, from $52. After dropping from $48 to $35 on Monday’s bad news, shares traded in the low $30s last week.

But Kraft Heinz bosses aren’t calling for a change in course. They stand by their cost cuts, and hope to do more mergers.

CFO David Knopf, in a conference call with investors, blamed “tariffs and transportation” costs, and higher interest rates for the company’s disappointing results. CEO Bernardo Hees, who also headed pre-merger Heinz and, before that, Burger King, insisted that “our model is working and has a lot of potential for the future.” More buy 'em, whack 'em back.

Food-industry analysts on the call, despite their history of applauding cost cuts, seemed sobered by the write-down and stock plunge, and repeatedly questioned how the company will make money using the same strategy that has so far failed.

Maybe what Kraft Heinz needs first aren’t more mergers and cuts, but "a bigger investment in the supply chain,” suggested analyst Rob Moskow of Credit Suisse, who cited consistent problems from frozen potatoes to sliced lunch meat. “Spend more on getting the products out, he urged.

But that’s not the owners’ plan because the firm’s supply chain already excels. “The whole investment,” CEO Hees responded, “is already behind us.”