More about book value and Kraft Heinz

Last week I commented on the $15.2B book value write-off of Kraft Heinz and argued that it would not matter as the market should have already detected the decline in operating cash flow and reacted by dropping the share prices, as was the case of the persistent decline in Kraft Heinz’s share price prior to the announcement.

Then the next day the market opened and immediately wiped off the market cap of Kraft Heinz further by about $15B. It cannot be coincidence that this amount is almost the same as the book value write-off, which prompted the question why.

A potential explanation would be there indeed were some serious manipulations of the accounting numbers that were uncovered and are under investigation by SEC now. To the extent that Wall Street usually also did their own market research instead of just relying on the companies’ filings, this probably has to do with some one-off mistake, albeit a big one.

Another possible explanation is that food companies, through decades of M&A, have gotten so big that they’re left with very few comparables. This means that something as large as Kraft Heinz, its value pretty much drive the market’s valuation of all other large food corporates. The correction of its valuation, validated by writing off goodwills from the previous M&A valuation of the assets, pretty much means the market has to adjust accordingly.

In any case it’s not really part of my VC day job to dig too deep into this, despite holding a CFA charter. The Motley Fool folks should have more fun there on this.

Silicon Valley Bank: when your niche becomes your defensibility

Does book value matter?