By Cara Lombardo and Annie Gasparro
Kraft Heinz Co. is nearing a deal to sell a big chunk of its cheese business to France's Groupe Lactalis SA for about $3.2 billion as the struggling U.S. food company seeks to jump-start growth in its other businesses, according to people familiar with the matter.
The deal is expected to be announced Tuesday, the people said, assuming there isn't a last-minute hitch. The transaction involves Kraft Heinz's natural-cheese business and consists of a mix of brands in the U.S. and Canada and the company's cheese business outside of North America, some of the people said.
Kraft Heinz has struggled in recent years with consumers defecting to foods that seem trendier or healthier and the pressure to revive sales has tempered its ability to improve profitability. That is reflected in a stock that has lost more than half its value and now gives the company a market capitalization of about $40 billion, not much more than its debt load of nearly $30 billion. Some proceeds from the sale are earmarked for debt reduction, one of the people said.
Kraft is holding a virtual meeting with its investors on Tuesday and already announced it plans to cut $2 billion in costs over five years, returning to the strategy that inspired the company's formation in a merger five years ago.
Closely held Lactalis, a global dairy company based in France, produces brie, ricotta and other cheeses in the U.S. and sells them under brands including President.
The company, which entered the U.S. about 40 years ago, has been on an expansion spree here, acquiring Stonyfield organic yogurt from Danone SA in 2017 in a deal valued at $875 million.
Adding the Kraft cheese business would boost the company's footprint further at a time when demand for staple groceries is higher than ever amid the coronavirus pandemic.
The sale will include Kraft shredded and blocks of cheese and the Cracker Barrel brand in the U.S., Breakstone's cottage cheese, and some other assets. Kraft Heinz will keep Philadelphia cream cheese, Velveeta, Cheez Whiz and Kraft Singles in the U.S. It will also retain its macaroni-and-cheese business world-wide.
In 2018, Kraft agreed to sell its Canadian natural-cheese business to Parmalat for over $1 billion.
Plans for the latest sale come as Kraft Heinz reorganizes its business under new platforms that it says are more focused on what consumers want, such as more convenient meals and snacks.
"We wandered away from the consumer," Kraft Heinz Chief Growth Officer Nina Barton said at the meeting Tuesday. "We are rebuilding the connection."
In the years following the merger, Kraft Heinz slashed about $1.7 billion in annual costs. Its sales growth and market share suffered.
That contributed to several of its biggest brands, losing value. Since February 2019, Kraft Heinz has written down the value of its brands by about $20 billion.
Kraft Heinz has also faced pressure from lower-priced store brands in cheese, deli meat and coffee. Kraft Heinz owns Oscar Mayer and Maxwell House, among other many other well-known brands.
Kraft Heinz Chief Executive Miguel Patricio said the company, which is partly owned by Brazilian investment firm 3G Capital, was too focused on cost cuts and made shortsighted decisions under its prior leadership. "We are changing that mindset," he said in an interview.
Last year, Mr. Patricio took over at Kraft Heinz after several years as chief marketing officer at Anheuser-Busch InBev SA, another company in which 3G's partners are invested.
Mr. Patricio said Kraft Heinz will be more strategic about how it cuts costs and will invest more of the savings in marketing its brands, rather than passing it all on to the bottom line like the company did in the past.
"Do we need to reduce margins to grow brands? The answer is no," he said.
Write to Cara Lombardo at email@example.com and Annie Gasparro at firstname.lastname@example.org