Kraft Foods (KRFT, Financial) announced that it shall merge with H.J. Heinz in a statement released on March 25. The combination declaration came as a big surprise to the company investors. Shareholders’, however, took the merger announcement positively, which sent the company shares up a staggering 30%. Before the announcement, earlier during the day a Wall Street Journal reported that Kraft was in discussions to be acquired by 3G Capital.
The combined entity (Kraft and Heinz) would be the third largest food company in North America, and the fifth largest globally. Let’s look into the details of the merger and try to identify the synergies from the deal.
Details of the deal
According to the terms of the deal, Kraft shareholders shall get a special cash dividend of $16.50 per share. The special dividend has been calculated on the closing price of Kraft stock on March 24. Besides, shareholders would also receive 49% stake in the new combined entity. The remaining 51% share would go to the existing Heinz shareholders - Berkshire Hathaway (BRK.A, Financial) and 3G Capital that jointly own Heinz. The two shareholders would together inject $10 billion into the new company.
The joint entity would be called Kraft Heinz Company. Kraft Foods’ revenue came in at $18.2 billion and net income stood at $1.04 in fiscal year 2014. The new company should record around $28 billion in revenue. The top line should see stronger growth over the years once the new entity start benefiting from the synergies of combination.
What are the synergies from combination?
Warren Buffet, the chairman and CEO of Berkshire Hathaway is extremely optimistic about the synergies the deal in going to bring. He said:
"This is my kind of transaction, uniting two world-class organizations and delivering shareholder value. I'm excited by the opportunities for what this new combined organization will achieve."
Heinz is a massive company with enormous international presence. It has a strong supply chain which should help Kraft grow in the international market and expand its brands globally. The rationale of the deal is to leverage each other’s strengths to expand and create value for the shareholders in the long term. Kraft and Heinz would together own 8 brands that would make $1 billion in annual sales and 5 more brands generating revenue in the range of $500 million to $1 billion revenue a year.
Kraft Heinz Company’s portfolio of brands would include Heinz, Kraft, Ore-Ida, Oscar Mayer, and Philadelphia. These are some of the most popular packaged food brands, which clearly indicates that the new entity is poised to benefit in a huge way. The top honchos appear quite excited about the deal development and believe this should bring significant cash returns to the shareholders. The joint company is strongly “positioned for growth” in the international market especially as some of Kraft’s top brand go global said Kraft’s chairman and CEO John Cahill. The new company should see cost synergies of around $1.5 billion by 2017 and this should boost the profitability margin.
Win-win situation
The merger of the two successful companies should bring strong returns to investors with solid growth prospects. Kraft Foods’ existing dividend per share would be maintained which should gradually increase in the future. The deal is pretty attractive for investors who look for regular and strong dividend payments. Kraft has a solid dividend payment history.
This along with the new company’s announcement of increasing dividend over time means that there are great rewards awaiting investors in the long term. The deal is accretive for both the companies and Kraft shareholders should vote in favor of the merger.
