Morningstar Analyst Explains Why She Raised Kraft's Fair Value Estimate A Night Before Merger Was Announced

Kraft Foods Group Inc (NASDAQ: KRFT) and owner of H.J. Heinz Company 3G Capital Inc. announced Wednesday that both the companies would be merging to create what, according to the companies, will be the North America's third-largest food company.

Erin Lash, Morningstar analyst, was on CNBC to discuss the acquisition of Kraft and why she raised her fair value estimates a night before the deal was announced.

Mutually Beneficial

"Obviously, this is an interesting transaction," Lash said. "Kraft's brands are obviously focused right now in the U.S., and so combining with Heinz provides that international distribution platform.

"And further, Kraft has been working as [...] an independent organization to cut costs and improve the efficiency of its operations – something that Heinz has been undergoing over the last two years under the ownership of 3G Capital."

Related Link: What Wall Street Thinks Of The Kraft-Heinz Merger

Raising Fair Value

Lash was asked why on Tuesday night she raised her value estimate of Kraft to $62 per share from $53, but also said in the note that this didn't included 'takeover premium.' She replied, "That was reflective of cost of capital assumptions, adjusting our rate of returns that we think investors are likely to demand over time.

"So, it's more reflective of our weighted average of cost to capital, as opposed to any change in our fundamental expectations."

Potential Acquisition Targets

On other food companies that could be acquisition targets due to low valuations and other competitors in the sector, Lash said, "Obviously, there has been a lot of talks in terms of [that] throughout the industry – ever since Heinz was taken out two years ago – in terms of potential acquisition targets and other players that might make sense," Lash averted.

"In this regard from our perspective, a competitor like Kellogg's or Campbell Soups. They are both undergoing turnaround from their core business over cereals and soups and, as such, don't necessarily seem to fit this mold," Lash concluded, naming only two competitors unlikely to become M&A targets for Kraft.