Commentary

Berkshire Hathaway, 3G Capital Blending Kraft With Heinz

In a match made in comfort-food nirvana — mac & cheese with ketchup — Warren Buffett’s Berkshire Hathaway and Brazilian private equity firm 3G Capital will merge H.J. Heinz Co. and Kraft Foods Group in a deal announced early this morning, creating the third-largest food and beverage company in North America and the fifth-largest in the world. The Kraft Heinz Co., with revenues of about $28 billion and eight billion-dollar-plus brands between them, will be co-headquartered in Pittsburgh and the Chicago area.

“Under the terms of the agreement, which has been unanimously approved by both Heinz and Kraft's Boards of Directors, Kraft shareholders will own a 49% stake in the combined company, and current Heinz shareholders will own 51% on a fully diluted basis,” according to a release announcing the deal. “Kraft shareholders will receive stock in the combined company and a special cash dividend of $16.50 per share. The aggregate special dividend payment of approximately $10 billion is being fully funded by an equity contribution by Berkshire Hathaway and 3G Capital.”

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An investor conference call is scheduled for 8:30 a.m., and a media call at 10. Contact details are in the release. The deal is pending regulatory approvals and the vote of Kraft shareholders but is expected to close in the second half of 2015. 

Penny pinchers, in particular, are swooning.

“In the world of mergers and acquisitions, 3G has won acclaim for its prowess both in striking deals and in improving companies once it has bought them,” writesThe New York Times’ Michael J. de la Merced in one of the many stories anticipating the deal following a scoop on the discussions yesterday by The Wall Street Journal’s Dana Cimilluca, Dana Mattioli and Annie Gasparro. “The firm has a reputation for solid management and relentless cost-cutting. (At Burger King, for example, the firm sold off the restaurant chain’s corporate jet and did away with an annual $1 million party in Italy.)”

“Our combined brands and businesses mean increased scale and relevance both in the U.S. and internationally, says Alex Behring, chairman of Heinz and the managing partner at 3G Capital, in announcing the deal. “We have the utmost respect for the Kraft business and its employees, and greatly look forward to working together as we integrate the two companies.” 

Still, there has to be a lot of nail-biting going on at Kraft’s Northfield, Ill. HQ this morning, as well as at its various brands. As The Times’ de la Merced points out, “four months after Berkshire and 3G Capital’s takeover of Heinz, 11 of the top 12 Heinz executives were replaced. This was followed by a series of layoffs.”

For his part, Buffettt, chairman and CEO of Berkshire Hathaway, says he’s “delighted to play a part in bringing these two winning companies and their iconic brands together. This is my kind of transaction, uniting two world-class organizations and delivering shareholder value.”

Behring will become the chairman of The Kraft Heinz Co. when the deal closes. John Cahill, Kraft chairman and CEO as of last December, will become vice chairman and chair of a newly formed operations and strategy committee of the board. Heinz CEO Bernardo Hees will be CEO of Kraft Heinz, with the rest of the executive team “announced during the transition period, but no later than transaction closing.” 

Berkshire Hathaway and 3G Capital acquired Heinz two years ago “and then helped finance 3G-owned Burger King Worldwide Inc.’s purchase of Canadian coffee-and-doughnut chain Tim Hortons Inc.,” observes Craig Giammona on Bloomberg.  

“Since those deals, speculation has simmered about what they’ll buy next — be it Kellogg Co., Kraft or Mondelez. Buffett stoked the conversation with his annual letter to Berkshire shareholders, saying he expects to ‘partner with 3G in more activities.’”

“Kraft Macaroni & Cheese. Oscar Mayer. Jello. Velveeta. Kool Aid. Capri Sun. Cool Whip. Shake N’Bake. Kraft’s product line reads like a list of the best hits of American processed food of decades past — and the company’s weak results of late reflect the fact that appetites are changing in the U.S. and around the world,” writes Heather Timmons on Quartz.

That “around the world” cuts both ways, however, if Kraft and Heinz can figure out a way to appeal to consumers’ changing tastes and address concerns about both additives and the paucity of natural nutrients in processed foods.

“Kraft's brands are currently focused in the United States, so combining with Heinz provides a platform for international distribution, Erin Lash, senior equity analyst at Morningstar, told CNBC,” writes Tom Christopher on CNBC.com.

In other news involving Kraft, there’s a simmering brouhaha over the Academy of Nutrition and Dietetics approving the use of its “Kids Eat Right” logo on packages of Kraft Singles “cheese product.” The Wall Street Journal’s Tennille Tracy wrote an excellent analysis of the controversy a couple of days ago.

Meanwhile, Wall Street seems to endorse the prospect of a Heinz Kraft casserole. “Kraft Foods Group Inc. surged 17% in extended New York trading after The Wall Street Journal broke the news about the discussions yesterday, Bloomberg reported last night.

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