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The press release from Heinz (HNZ) this morning is reasonably straight forward, but doesn't sit well with us – it reads more like a commercial than a financial release (“Foodstar has delivered excellent results and has performed well beyond our expectations since joining Heinz.”)  The meat of the release is that HNZ owes an incremental $60 million earn-out payment related to its acquisition of the Foodstar business in China back in November of 2010 – the original purchase price was $165 million.  The earn-out will be treated as an extraordinary item, resulting in a $0.04 charge in the upcoming quarter.



Just to review, Heinz made this comment regarding Foodstar at a conference back in September of 2011:

 

“Approaching $150 million in FY12 expected net sales.”

 

Shortly after making the acquisition (February 24, 2011), HNZ commented

 

“Expecting >$100 million sales in FY12.”

 

Today, HNZ said:

 

“The business has grown to well over $200 million in sales.”

 

So it seems that sales have approximately doubled since the purchase, while the purchase price has gone up by approximately 40% - good stuff.  We have a couple of issues, however.

  1. As mentioned, the press release is highly promotional
  2. Why is the incremental cost treated as extraordinary?

It appears to us that HNZ wants to have its cake and eat it too - get the benefit on the top line and to EPS, but have the cost broken out as an item.  To be clear, the accounting treatment is correct, but it just doesn’t sit well with us, nor does the highly promotional nature of the press release. Keeping with the food metaphors, it seems like the company is positioning itself for a free lunch.

 

Bottom line, HNZ remains one of our least preferred name in staples.

 

Call with questions.

 

- Rob


Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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