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Kraft Foods and H J Heinz, two icons of the American food industry, are merging in a blockbuster deal involving the billionaire Warren E Buffett and the Brazilian investment firm 3G Capital, creating what will be the fifth-largest food and beverage company in the world.
In addition to its ketchup, Heinz sells sauces, soups, beans, pasta and Ore-Ida potatoes, among other food brands. Kraft's brands include Jell-O, Kool-Aid, Lunchables, Maxwell House, Oscar Mayer, Philadelphia, Planters and Velveeta. The combined company will have revenues of about $28 billion, with eight individual brands each reporting sales of at least $1 billion a year, and five brands with between $500 million and $1 billion in sales.
Heinz, which is owned by 3G Capital and Buffett's Berkshire Hathaway, will control 51 per cent of the combined company, while Kraft shareholders will own 49 per cent.
Kraft shareholders will also receive a special cash dividend of $16.50 per share, or about $10 billion, to be paid for by 3G Capital and Berkshire Hathaway. The dividend represents a 27 per cent premium to Kraft's closing price on Tuesday, giving Kraft a value of about $46 billion in the deal.
As he did in with Heinz, Buffett played a significant role in bringing the deal together. His company, Berkshire Hathaway, is investing alongside 3G Capital again, and will help pay for the dividend for Kraft shareholders.
"I am delighted to play a part in bringing these two winning companies and their iconic brands together," Buffett said in a statement. "I'm excited by the opportunities for what this new combined organisation will achieve."
The deal marks a return to megadeals for Buffett, who has maintained that he is on the hunt for "elephants" - large companies he could incorporate into the growing Berkshire Hathaway conglomerate.
From its base in Brazil, 3G has become a powerhouse in the world of food brands. The firm, which counts the billionaire financier Jorge Paulo Lemann among its owners, has made daring moves for companies like Burger King, which it bought in 2010.
Two years ago, 3G and Buffett - a public admirer of Lemann and his firm - teamed up to buy Heinz for $23 billion. Last summer, 3G, through Burger King, bought the Canadian coffee-and-doughnut chain Tim Hortons for about $11.4 billion, with the aim of creating a global fast-food empire whose offerings stretch from breakfast to dinner.
With 3G, Kraft will get management known for its cost-cutting skills and strategic acumen. Alex Behring, the managing partner of 3G will be chairman of Kraft Heinz, while Bernardo Hees, the chief executive of Heinz, will be the CEO of the combined company.
The companies said they estimated they could find savings of $1.7 billion annually by the end of 2017 through cost reductions and efficiencies of scale. The combined company intends to pay a dividend, as Kraft does today, and increase it over time.
Kraft is the product of a 2012 split that created Mondelez International. The company has been wrestling with low margins and flat sales amid the shifting tastes of consumers.
Since the breakup, Kraft's sales have been relatively flat at about $18 billion. Its overall profit last year fell 62 per cent, to $1 billion, weighed down by the commodity costs of coffee, cheese and meat. The company has tried to cut costs and raise prices. But packaged-food companies as a whole have grappled with disappointing sales, owing to a drop in spending by lower-income customers and a change in tastes among more affluent buyers.
Late last year, Kraft took Wall Street by surprise when it replaced its chief executive, Tony Vernon, with its chairman, John Cahill.
The combined company will have co-headquarters in the Chicago and Pittsburgh areas.
Lazard and the law firms Cravath, Swaine & Moore and Kirkland & Ellis advised Heinz. Centerview and the law firm Sullivan & Cromwell advised Kraft.
©2015 The New York Times News Service
