Where Are The Synergies Of The Kraft/3G Merger?

Citi issued a report on Kraft Foods Group Inc (NASDAQ: KRFT) on Monday offering a perspective on the valuations between Kraft and Heinz after news of their merger. Citi rates Kraft as a Sell and raised its price target from $58 to $80.

Analysts David Driscoll wrote, "We worked the math on how Kraft and Heinz were valued in their merger of equals, and have come to the conclusion that Heinz received an EBITDA multiple at a significant +33 percent premium relative to Kraft...We are still trying to figure out where is the fat on the SG&A (ex. advertising) side in the combined company. Heinz's 2014 ratio looks to be 15.0 percent of sales (vs. 18.4 percent in old pre-deal F13), while Kraft's was 10.0 percent. As such, Kraft SG&A appears to be running much leaner than Heinz."

Kraft and 3G have not discussed the size or timing of potential revenue or cost synergies that were the hallmarks of this deal. Prior to the deal announcement, Citi's Sell rating on Kraft shares was grounded in the company's weak fundamentals, market share declines in categories that represent over 65 percent of sales, declining volumes, and no strategy for participating in the growing natural/organic segment.

Analysts believe that 3G's $1.5 Billion savings opportunity discussed in the deal may be too aggressive and it may be difficult for the combined company to have as much success as expected.

Shares of Kraft Foods closed Friday at $89.10.