 2015 Merger – Accounting Treatment

In 2015, Kraft raised the possibility of adjustments to the purchase price allocation that would
reflect changes in identifiable intangible assets, income tax accounts, and goodwill. In 2015,
identifiable intangible assets consisted of $45.1 billion of indefinite-lived trademarks, $1.7
billion of definite-lived trademarks, and $3.0 billion of customer relationships, which
amounted to $49.7 billion of identifiable intangible assets. In 2016, this was adjusted due to
a decrease in indefinite-lived trademarks to $43.1 billion.
The total consideration for the transaction amounted to $52.6 billion, and the total of net
assets acquired totalled $22.2 billion. Since goodwill represents the excess of the purchase
price paid over the fair value of the net asset acquired, the goodwill recognised for the
transaction amounted to $30.5 billion:
𝑔𝑜𝑜𝑑𝑤𝑖𝑙𝑙 = 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 − 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑛𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑑
$52,637𝑚 − $22,175𝑚 = $30,462𝑚
Purchase price allocation to assets acquired and liabilities assumed was (in millions):
2015 2016
Cash $314 $314
Other current assets 3,423 3,423
Property, plant and equipment 4,193 4,179
Identifiable intangible assets 49,749 47,771
Other non-current assets 214 214
Trade and other payables (3,026) (3,026)
Long-term debt (9,286) (9,286)
Postemployment benefits and other non-current liabilities, net (4,734) (4,739)
Deferred income tax liabilities (17,239) (16,675)
Net assets acquired 23,608 22,175
Goodwill on acquisition 29,029 30,462
Total consideration 52,637 52,637
Fair value of shares exchanged and equity awards 42,855 42,855
Total cash consideration paid to Kraft shareholders 9,782 9,782
Cash and cash equivalents of Kraft at the 2015 Merger Date 314 314
Acquisition of business, net of cash on hand $9,468 $9,468

Source: Annual Reports, 2015-18

[Valuation methods used?]

After the merger of Kraft and Heinz in 2015, a total of $29.0 billion of goodwill was recorded,
which consisted of $25.0 billion from the United States segment and $4.0 billion from the
Canada segment. In 2016, a further $1.4 billion of goodwill were recorded which related to
the US segment, bringing the total goodwill balance to $30.5 billion relating principally to
synergies expected to be achieved from the combined operations. This $1.4 billion increase
in goodwill reflects primarily a decrease in identifiable intangible assets.
Changes in the carrying amount of goodwill, by segment, were (in millions):
US Canada Europe World Total
Balance at December 28, 2014 $8,754 $1,348 $3,454 $1,403 $14,959
2015 Merger purchase accounting 25,008 4,021 - - 29,029
Translation adjustments - (568) (208) (207) (983)
Other 1 (5) (94) 144 46
Balance at January 3, 2016 $33,763 $4,796 $3,152 $1,340 $43,051

Balance at January 3, 2016 $32,290 $4,796 $3,227 $2,738 $43,051

2015 Merger adjustments 1,433 - - - 1,433
Translation adjustments (27) 117 (449) - (359)
Balance at December 31, 2016 $33,696 $4,913 $2,778 $2,738 $44,125

Balance at December 31, 2016 $33,696 $4,913 $2,778 $2,738 $44,125

Translation adjustments and other 4 333 281 81 699
Balance at December 30, 2017 $33,700 $5,246 $3,059 $2,819 $44,824

Balance at December 30, 2017 $33,701 $5,246 $3,238 $2,640 $44,825

Impairment losses (4,104) (1,947) - (957) (7,008)
Reclassified to assets held for sale - (496) - (173) (669)
Acquisitions - 16 - 25 41
Translation adjustments and other - (381) (164) (141) (686)
Balance at December 29, 2018 $29,597 $2,438 $3,074 $1,394 $36,503

Source: Annual Reports, 2015-18

Of the $7.0 billion accumulated impairment losses, $6.9 billion related goodwill impairment
losses. These related to SG&A for five reporting units, namely U.S. Refrigerated with a $4.1
billion impairment loss, Canada Retail with a $1.9 billion impairment loss, Southeast Asia with
a $315 million impairment loss, Northeast Asia with a $302 million impairment loss, and Other
Latin America with a $207 million impairment loss. These reporting units saw a write-down
of their excess fair value to their respective fair value as per 2018 impairment testing.
Changes in the carrying amount of indefinite-lived intangible assets were (in millions):
Balance at December 28, 2014 $11,872
2015 Merger purchase accounting 45,082
Impairment losses on indefinite-lived intangible assets (58)
Transfers to definite-lived intangible assets (553)
Translation adjustments (519)
Balance at January 3, 2016 $55,824

Balance at January 3, 2016 $55,824

2015 Merger adjustments (1,978)
Translation adjustments (539)
Balance at December 31, 2016 $53,307

Balance at December 31, 2016 $53,307

Translation adjustments 397
Impairment losses on indefinite-lived intangible assets (49)
Balance at December 30, 2017 $53,655

Balance at December 30, 2017 $53,655

Impairment losses (8,925)
Reclassified to assets held for sale (341)
Transfers to definite-lived intangible assets (72)
Translation adjustments (351)
Balance at December 29, 2018 $43,966

Source: Annual Reports, 2015-18

Of the $8.9 billion of impairment losses, $8.6 billion recognised indefinite-lived intangible
asset impairment losses. These related to SG&A for five brands, namely Kraft with a $4.3
billion impairment loss, Oscar Mayer with a $3.3 billion impairment loss, Philadelphia with a
$797 million impairment loss, Velveeta with a $168 million impairment loss, and ABC with an
$84 million impairment loss.
What went wrong?
The $30.5 billion of goodwill in purchase accounting represented “principally to synergies
expected to be achieved from the combined operations and planned growth in new markets.”
In 2015, management highlighted “[s]ignificant synergy potential [of] $1.5 billion in run-rate
annual cost savings by 2017” and “[s]ignificant revenue synergy opportunity, with strong
platform for international growth”. Management expected to leverage Heinz’ existing
international sales channels for expansion of Kraft products, which primarily sold in North
America. However, although Kraft Heinz’ EMEA and Rest of World segment sales have
increased steadily, overall sales growth has proven to be slow and cost cutting measures have
proven ineffective.
Moreover, the majority of net assets consisted of intangible assets, and of the $47.8 billion
identifiable intangible assets, the majority consisted of trademarks. Thus, only c. 6% of total
invested capital related to tangible assets while 94% related to intangible assets. Further, due
to the substantial decrease in share price value (27% on the trading day after the initial
announcement alone), the underlying loss in market value ultimately contributed to the
intangible asset impairment loss.
[TBD]