Brazilian acquisition and investment firm 3G Capital Partners LP is in “advanced” talks with American processed and packaged foods company Kraft Foods Group Inc. (KRFT, Financial), The Wall Street journal reported yesterday. The private equity firm had previously partnered with Warren Buffet’s Berkshire Hathaway Inc. (BRK.A, Financial) in 2013 to acquire ketchup and frozen foods brand H.J. Heinz Co. for $23 billion. Now, 3G is looking to shake up the processed food industry in the US, once again, by acquiring Krafts and merging it with it Heinz Co. unit. This would combine two of the biggest names on the supermarket shelves of the United States of America and the world.
People in the know have revealed the value of the deal could go up to around $40 billion, but it could also end up falling apart until confirmation of the deal is widely publicised. The deal’s proposed value would reflect an approximately 8% premium to Kraft’s market value before The WSJ reported takeover talks. Kraft’s market value stood at around $37 billion, before the news broke out last night.
Crafting consumer demand
Krafts is a North American food and beverages manufacturer, established in 1902. It is the manufacturer of iconic American food brands such as Macaroni & Cheese, Oscar Mayer, Jello, Velveeta, Kool Aid, Capri Sun, Cool Whip and Shake N’ Bake. It revamped product line and branding in 2012.
“One of the largest consumer packaged goods companies in North America, Kraft has 22,500 employees across the U.S. and Canada and $18 billion in annual sales,” says the company about itself on its corporate website.
In 2014, owing to a change in consumer preference for processed foods, Kraft’s earnings fell by a drastic 62%. December 2014 saw former CEO of Pepsico John Cahill take over the helm at Kraft with a promise to “take a fresh look at the business”. But he couldn’t change the tide of consumer demand for packaged foods turning further away in the US. Couple that with a $398 million fourth-quarter loss from paying for employment benefits, announced in February 2015, and the result was that Kraft’s CFO Teri List-Stoll, chief marketing officer Deanie Elsner and executive VP of R&D and Innovation Chuck Davis exited the company.
Takeover tactics
3G had put Heinz through a cost-cutting exercise soon after takeover to revive the struggling condiments business. In 2004, they combined Latin brewers, they already owned, with Belgian brewers InterBrew NV in an $11 billion merger. In 2008, they compounded this with another $52 billion merger with Anheuser-Busch Cos (BUD, Financial) to now own the largest beer manufacturing company in the world. In 2014, 3G’s fast food chain Burger King Worldwide Inc. (BKW, Financial) expanded to acquire Tim Hortons Inc (THI, Financial), a Canadian chain of coffee and doughnut stores. Now, 3G was looking for acquisitions after, reportedly, raising $5 billion in investment capital. The firm is known for acquiring seemingly over-valued consumer goods companies and turning them around by drastically cutting costs of operations. Billionaire Jorge Paulo Lemann co-founded 3G with Alex Behring, Carlos Alberto Sicupira, Marcel Herrmann Telles and Roberto Thompson Motta.
If the deal goes through and 3G acquires Kraft Foods, analysts expect to see a swift turnaround in the struggling food manufacturing company’s fortunes.
