The Kraft Heinz Co. has agreed to pay $450 million to settle a securities class action lawsuit filed by investors, including Swedish pension fund AP7, that alleged Kraft Heinz made materially misleading statements related to the 2015 merger of Kraft Foods Group Inc. and the H.J. Heinz Co. Hedick v. Kraft Heinz Co. et al., was filed in 2019 in U.S. District Court for the Northern District of Illinois, and the settlement was published on May 5.
In the complaint, the investors, with AP7 one of two lead plaintiffs in the class, said Kraft Heinz claimed after the merger, which was conducted by private equity firm 3G Capital, that the merged company was seeing increased profits and margins due to cost-cutting synergies between the combined operations.
However, by early 2017, “3G Capital’s indiscriminate cost-cutting measures had gutted the company’s ability to generate revenue, and there was no further viable cost-cutting to squeeze out of the company,” the complaint said, adding that Kraft Heinz “consistently missed internal profitability targets by significant margins.” The plaintiffs alleged that the cost-cutting measures deteriorated Kraft Heinz’s brand value and led to a “massive” intangible asset impairment charge.
The “fraud began to unravel through a series of three corrective disclosures,” the complaint said. The first, it said, came when Kraft Heinz disclosed a “significant decline in earnings driven by its failure to achieve cost-savings and the need for additional brand investments,” which Kraft Heinz said led to a nearly 10% drop in stock price in one day. The second came, according to the complaint, when Kraft Heinz disclosed a $15.4 billion intangible asset impairment charge and provided earnings guidance for the coming year that missed expectations by $1 billion.
“These disclosures led to a stock price decline of almost 28%,” stated the complaint, which also charged that the third disclosure made by the company revealed “further sales and earnings misses and an additional $1.2 billion goodwill impairment charge.”
In 2021, Kraft Heinz agreed to pay a $62 million fine to the Securities and Exchange Commission for “accounting misconduct” conducted from 2015 through 2018 that misled investors about the merged company’s earnings performance.
Under the Hedick v. Kraft Heinz Co. et al. settlement, Kraft Heinz continues to deny any wrongdoing and denies violating U.S. securities laws. The deal stipulates that the company is only agreeing to the settlement in order to eliminate the “uncertainty, burden, and expense” of a lawsuit.
Kraft Heinz said in an emailed statement that it is “pleased” that a settlement agreement has been reached.
“From the moment the complaint was introduced we have strongly defended against the allegations,” Kraft Heinz said. “But this resolution allows the company to focus on the future while avoiding the continued expense, inconvenience, and uncertainties of litigation.”
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Tags: 3G Capital, AP7, goodwill charge, Kraft Heinz, Merger, Pension Fund, securities lawsuit, Securities Litigation, Settlement, write-down