Kraft Foods Group, Inc. (KRFT, Financial), one of the big names in the packaged foods business, is about to strike a merger deal with Heinz, the deal being orchestrated by Warren Buffett’s Berkshire Hathaway (BRK.A, Financial) and the Brazilian private equity firm 3G Capital Partners L.P. Though details on the deal value have not yet been shared by the companies’ management, based on Kraft Food’s market capitalization, soon after the announcement investors pegged it at $49 billion. This deal would be one of the largest deals in the U.S. food and beverage industry and the combined entity would rank as the fifth largest global Food and Beverage Company, as per Euromonitor International Inc. The acquisition is expected to close in the later part of this year. Kraft shares increased almost 16.5% to $71.44 in after-hours trading on Tuesday after this merger news surfaced to the top.
The deal details
It was late Tuesday this wee, when Wall Street sources first shared the information that the two big honchos in the packaged food business, Kraft Foods and H.J. Heinz, were in merger talks. As per the details on the deal that have been made public, Heinz shareholders would hold about 51% stake in the merger company, while Kraft Food shareholders would have the remaining 49% stake of the combined entity.
The combined company will be known as "Kraft Heinz Company," after an additional funding of $10 billion by Berkshire Hathaway Inc. and 3G Capital is expected to pay out the special dividend of $16.50 a share payable to Kraft shareholders after the merger.
The new entity will have a well-defined product portfolio including well-known brands such as Oscar Mayer meats, Maxwell Coffee house, Planters nuts along with the namesake Kraft cheese products and Heinz ketchup and condiments. The revenue of the combined company is estimated to be about $28 billion.
Annual cost savings for the companies isexpected to be to the tune of $1.5 billion by 2017, if the deal goes ahead smoothly. It has been shared that the new company’s shares would be traded publicly after the stated merger enters the completion phase. Berkshire and 3G Capital have also indicated that they do not intend to sell their stakes in the new company soon, and have been heard mentioning that they “are committed to long-term ownership of the Kraft Heinz company.”
Solving Kraft’s woes
Packaged food giant Kraft Foods has seen a dip in sales recently due to changing consumer tastes preferring healthier food options. Last year, Kraft’s revenue was somewhat flat at $18 billion, while its net profit fell 62% to $1 billion. In fact, the company stated that it lost market share in 40% of its U.S. businesses and sales in the other segments were flat. The company has tried several options to create a turnaround in its sales which have actually led to several controversies in recent times. Now, with this merger happening, things might change for better with Kraft’s product portfolio getting enriched with much better options for the consumers.
What is Buffett saying?
When questioned on whether this deal structure looks attractive to the Kraft’s shareholders, Mr. Buffet stated – “So far it looks like they like it, and if they don’t like it, they can probably sell it for a lot more than perhaps Kraft could have been sold to anybody else…” He further went ahead to add during an interview with CNBC that Berkshire would hold about 320 million shares in the newly formed entity after the merger completion.
Last word
With Kraft Foods working on its sales turnaround, and trying to re-position its products as per changing consumer tastes, this merger with H.J.Heinz would surely serve as an impetus for sales to once again move into the positive territory in the upcoming quarters. Also with the interest shown by Berkshire and 3G Capital on this deal, it is apparent that the combined entity will have a great future ahead, and hence investors should stay calm and wait to see the ultimate effect of the merger in the days to come.
