A Tale of Two Charge-Offs: Kraft Heinz vs. WPP

The advertising and financial community was shocked by Kraft Heinz39s KHC39s recent 154 billion chargeoff 71 billion for goodwill and 83 billion for other assets in 2018 coming as it did only four years after the merger of these two food giants The market punished Kraft Heinz with a 25 drop in its share price This was hardly the Madison Avenue Makeover hoped for by Kraft and Heinz investors including Warren Buffett and 3G CapitalQuite different was the amp163302 million chargeoff 400 million by WPP for its threeyear restructuring and transformation planamp160 The chargeoff will give WPP the accounting flexibility to restructure reduce its complexity and reinvest in creativity tech and talent through 2021amp160 The stock market39s reactionamp160 A 7 increase in WPP39s share price Madison Avenue Makeover in actionAll writeoffs quotreservesquot writedowns or chargeoffs have something in common they reduce shareholder equityamp160 That39s just as true for Kraft Heinz as it is for WPPamp160 A chargeoff says quotvalue that we once booked in our equity account now has no value and is being removed immediatelyquotUnrealistic KHC ExpectationsKHC booked high values of goodwill and other assets in the KHC equity account when Kraft and Heinz merged in 2015amp160 Management expected to realize synergies from higher international growth and cost economies of scaleamp160 In the four years since the merger though management has failed to realize these synergiesamp160 With the benefit of hindsight we can see that they seriously overvalued Kraft Heinz when putting the two companies togetheramp160 The 154 billion chargeoff took 23 out of the 2017 KHC equity valuequotHere39s what happens when 3G buys your companyquot announced a Fortune article at the time of the merger in 2015 highlighting the extreme downsizings and cost eliminations that could be anticipated at KHC the quot3G Wayquotamp160 The marketing community jumped on the 2018 KHC writedowns seeing in them proof that the 3G Way does not add value and cripples existing brandsFor WPP the 2018 chargeoff of amp163302 million 400 million was a different storyamp160 The chargeoff created a quotreservequot that Mark Read can dip into for cost investments through 2021 that will not have an impact on WPP39s future profitsamp160 Read already wrote off the costs in the quotbig bathquot 2018 chargeoff even though in reality it was only a tinysized bath amp160it affected only 3 of WPP39s 2017 equity valueIn effect WPP was charging off some of the quotexcess profitsquot generated during past years when WPP agencies aggressively downsized and cut costs to generate large and growing profit margins for the holding companyamp160 WPP now has to claw back some of those cost reductions to invest for the futureThe magnitude of quotexcess cost reductionquot in the past exceeds the amp163302 million reserve I believeamp160 Mark Read may find that he needs to take additional chargedowns in the future to invest at the required rateamp160 I suspect that a amp1631 billion investment might be required amp160but this is still only 10 of WPP39s equityRead39s accounting conservatism in 2018 was certainly understandableamp160 This was WPP39s first chargeoff for future investment and Read could not have known what the market39s reaction might have beenamp160 As it turned out he was given a strong vote of confidence by investorsIn this respect the WPP39s chargeoff is entirely different from that ofamp160Kraft Heinzamp160 WPP said quotWe have to make some strategic investments in the future to get us where we need to goquotamp160 The market agreedKraft Heinz39s statement was less inspiringamp160 quotWhoops We really fked upquotamp160 Investors must now wait for a new turnaround plan from the tarnished KHC management teamClick the social buttons above or below to share this story with your friends and colleaguesThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

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A Tale of Two Charge-Offs: Kraft Heinz vs. WPP

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Michael Farmer

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A Tale of Two Charge-Offs: Kraft Heinz vs. WPP

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