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Share in Kraft (NASDAQ:KRFT) climbed by an amazing 40% today following news late Tuesday, 24 March, that a merger offer has been made by Berkshire Hathaway and Brazilian company, 3G Capital, through their jointly-owned food product manufacturer, Heinz. The share price reached a record high of 87.88 before noon today. Berkshire Hathaway and 3G acquired Heinz in 2013 and took the company private. (Current U.S. Secretary of State John Kerry is married to the former Theresa Heinz, heiress to the family fortune.)
The new company, Kraft Heinz, will be publicly traded and will become the third largest food and beverage company in the U.S. and the fifth largest in the world with revenue of “about $28 billion.” While details are not fully known, the Wall Street Journal expects the deal to be valued at more than $40 billion.
Other details of the deal . . .
Here is what we know so far:
- Heinz shareholders will retain 51% ownership in the new company.
- Kraft shareholders will received a cash dividend of $16.50 per share. The special dividend will be funded by a $10 billion contribution by Berkshire Hathaway and 3G.
- Berkshire Hathaway will own 320 million shares.
- Alex Behring will become the chairman of Kraft Heinz. He is currently chairman of Heinz and managing partner of 3G Capital.
- Bernardo Hees will become the new CEO. He is currently CEO of Heinz.
- Kraft chairman, John Cahill, will become the Kraft Heinz vice-chairman.
Why it makes sense
U.S. food and beverage companies are feeling the economic squeeze brought about by rising costs on the one hand and consumers tightening their spending on the other. Heinz has the stronger international presence that will provide increased exposure and opportunities world-wide for the popular Kraft brands. In fact, Mr. Behring commented that, “By bringing together these two iconic companies through this transaction, we are creating a strong platform for both U.S. and international growth.”
The deal is one in a series of collaborations between Berkshire and 3G, which included the aforementioned acquisition of Heinz in 2013. 3G Capital seems to favor companies in the food and beverage sector, having acquired Burger King for $3.8 billion in 2010 and Canadian icon Tim Hortons for $12.5 billion in 2014. Much like Kraft and Heinz, those two companies were combined to form Restaurant Brands International (NYSE:QSR).
The merger is expected to generate $1.5 billion in annual cost savings by the end of 2017.
You could almost sense the excitement in his voice as Berkshire Hathaway CEO, Warren Buffett, exclaimed, “This is my kind of transaction, uniting two world-class organisations and delivering shareholder value.”
Kraft was founded in 1923 as National Dairy Products Corporation. In 1924 it changed its name to Kraft Cheese Company and began a campaign of M&A that drove its growth in the 20th century. Current popular Kraft brands include A.1. Steak Sauce, Grey Poupon, Planters peanuts, Jell-O, Oscar Meyer, Maxwell House coffer, Kool-Aid, and its flagship pasteurized cheese product, Velveeta.
In addition to the products branded under its own name, Heinz also owns or is a licensee for Wyler’s (competitor to Kool-Aid), Lea & Perrins (competitor to A.1.), HP (also competitor to A.1), Ore-Ida, Bagel Bites, T.G.I. Friday’s and Weight Watchers in-store brands.
Kraft’s share price is currently (6:20 pm GMT) at 82.66.
