Kraft And Heinz – The Unique Merger Of 2015

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Mar 30, 2015

The mega merger between H.J. Heinz Company (HJH, Financial) and Kraft Foods Group (KRFT, Financial) was announced recently. Warren Buffett (Trades, Portfolio) brought together H.J. Heinz Company and, Kraft Foods Group with participation from private equity firm 3G Capital Partners. The new company will be called Kraft Heinz Co.

Jorge Lemann of Brazilian investment firm 3G Capital has partnered with Warren Buffet at Heinz and now in the mega-deal with Kraft, they have together discovered new ways to run their packaged food business, a segment that was considered to have reached its termination date. Kraft will own 49% of the newly formed company and Heinz, which is currently owned by Brazil's 3G Capital Partners and Buffett's Berkshire Hathaway Inc. (BRK.A, Financial), will jointly own the rest of the 51% share. Mergers as huge as this one are not new these days. Consumers are highly cost sensitive, and there is always a constant effort for cost-cutting solutions among businesses. The chairman of Berkshire Hathaway, Warren Buffett, said that this is his kind of deal transaction as it unites two world class organizations to deliver shareholder value. He proclaimed he was delighted to play a role in bringing the two companies together.

The number of deals in the food industry has increased rapidly in recent years since the acquisition of Heinz in early 2013. Mondelez (MDLZ, Financial) merged its coffee business with Dutch group DE MasterBlenders, while China’s Shuanghui International bought U.S. pork processor, Last year, as cereal demand continued to drop across the U.S., General Mills (GIS, Financial) acquired Annie’s (BNNY, Financial), a natural foods company, for $820 million.

Deal details

This deal is peculiar from the start. Kraft shareholders will get one share of Heinz for each share of Kraft stock. This is regular; the queer part is that Heinz is private and will publicly list its share price in connection with this transaction. As Heinz is not a publically traded company, the share price is uncertain. Kraft has put their trust in Heinz. This is not a big risk as the stock price of Heinz would be similar to that of Kraft. H.J. Heinz's common stock was delisted from the New York Stock Exchange (NYSE) in July 2013. Since Heinz has a better success run, it may be priced higher than Kraft itself. Warren Buffett (Trades, Portfolio) and Jorge Lemann are extremely good negotiators and they know the best about Heinz's stock price. 3G Capital and Berkshire Hathaway bought Heinz two years ago and made the company private. The deal is specifically structured to keep Berkshire Hathaway and 3G Capital in power. If they had paid in only stock then Berkshire and 3G's share would have been less than 50% and they would have lost control. Thus each Kraft shareholder will receive a special cash dividend of $16.50 per share as part of the deal. Berkshire and 3G Capital are paying $10 billion for the special dividend payment.

Kraft Heinz Co. will include Kraft, Heinz and hotdog maker Oscar Mayer which currently has a combined sales worth $29 billion. The company targets to make annual cost savings of $1.5 billion by the end of 2017.

Brand portfolio

Heinz’s brands include some famous packaged food brands namely Classico pasta sauce, Heinz Ketchup, Ore-Ida, Lea & Perrins, Bagel Bites, Nurture infant formula, Weight Watchers Smart Ones, and Golden Circle. Kraft Foods Group Inc. includes A1, Athenos, Breakstones, CapriSun, Cheez Whiz, Cracker Barrel, Cool Whip, Country Time Lemonade, Jell-O, Kool Aid, Maxwell House, Oscar Mayer, Planters, Stove Top and Velveeta.

Heinz's CEO Bernardo Hees will be the chief executive of the newly formed company. The new Kraft Heinz Company will be co-headquartered in the Pittsburgh and Chicago areas.

Parting words

The market seemed to be comfortable with the deal as Kraft's share price surged 36% the day the deal was announced. The industry is looking for cost cutting and efficient ways and 3G has a reputation for introducing aggressive cost cuts and improving efficiency at other companies it has invested in the past. This is being viewed as a plus point for the combined company as it would take cost cutting in food packaging to a new level.