Kraft Foods, H.J. Heinz to Merge -- 8th Update

By Dana Cimilluca, Dana Mattioli and Chelsey Dulaney 

Kraft Foods Group Inc. and H.J. Heinz Co., with help from its owner 3G Capital Partners L.P. and Warren Buffett's Berkshire Hathaway Inc., have agreed to merge in a deal that would create the world's fifth largest food and beverage company.

The combined company, which will be called the Kraft Heinz Co., will have revenue of about $28 billion and include well-known brands like Jell-O, Maxwell House coffee and Planters nuts. The deal comes as Kraft and other major U.S. food makers struggle with changes in consumer tastes that have hampered their ability to sell packaged, processed food.

The Wall Street Journal was first to report late Tuesday that the two companies were in talks, with a deal likely to top $40 billion.

Shares of Kraft surged 34% in afternoon trading to $82.19.

Heinz shareholders will hold a 51% stake in the combined company, while Kraft shareholders will hold a 49% ownership stake. Kraft shareholders also will receive a special dividend of $16.50 a share, representing 27% of Kraft's closing price on Tuesday.

The companies didn't disclose a value for the deal, but based on Kraft's market capitalization following the announcement, investors pegged it around $48 billion.

The new company's shares would trade publicly, according to a statement announcing the deal. Berkshire and 3G also indicated they don't intend to sell their stakes in the new company any time soon, saying they "are committed to long-term ownership of the Kraft Heinz company."

Mr. Buffett said on CNBC that Berkshire would own about 320 million shares in the new company. He added that the deal had been in the works for about four weeks.

On whether the deal's structure is attractive enough for Kraft shareholders, Mr. Buffett said, "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."

Under the deal's terms, Berkshire and 3G Capital will provide the $10 billion to fund the special dividend. In 2013, 3G teamed up with Mr. Buffett to buy U.S. ketchup maker Heinz for $23 billion.

3G, an acquisitive Brazilian firm known for buying consumer companies it considers bloated and aggressively slashing costs, has been looking for targets after it recently raised some $5 billion for deal making.

Annual cost savings from the Kraft and Heinz combination could reach $1.5 billion by the end of 2017, the companies said Wednesday.

3G has become a major player in the U.S. food sector. Billionaire co-founder Jorge Paulo Lemann was a big shareholder in brewer InBev and helped engineer its 2008 acquisition of Anheuser-Busch.

In 2010, 3G took private fast-food restaurant Burger King Worldwide Inc. Last year, 3G bought Canada's coffee-and-doughnut retailerTim Hortons Inc. through its Burger King holding. The $11 billion deal was financed in part by Mr. Buffett.

Alex Behring, chairman of Heinz and managing partner at 3G Capital, will become the chairman of Kraft Heinz, and Bernardo Hees, chief executive of Heinz, will be the CEO. John Cahill, Kraft chairman and CEO, will become vice chairman, and the board of directors will consist of five members appointed by the current Kraft board, as well as the current Heinz board, including three members each from Berkshire and 3G Capital.

Kraft today is a mostly U.S. food conglomerate whose brands include Oscar Mayer deli meats and Kool-Aid in addition to its namesake cheese products. The company has struggled of late, buffeted by changes in consumer tastes and other factors that have challenged many of the biggest and most established packaged-food companies.

Kraft's revenue last year was effectively flat at $18 billion, while net profit fell 62% to $1 billion, in part because of higher commodity costs and big charges related to post-employment benefit plans. The company has said it lost market share in 40% of its U.S. businesses and was flat in the rest.

Today's Kraft was born in a huge corporate split in 2012, when it was spun off by its namesake, leaving an international snacks company now called Mondelez International Inc.

Kraft has touted its leaner cost structure compared with other packaged food companies, having cut jobs and eliminated other costs. But it is still highly vulnerable to the changes in consumer tastes.

As people shift to buying fresher foods they perceive as healthier, Kraft has attempted to adapt by taking artificial coloring out of some of its cheeses. It also has trumpeted a high-protein snack pack called P3--which combines meat, cheese cubes, and nuts--sold by its Oscar Mayer brand.

Another recent effort stirred controversy: Kraft struck a deal to put The Academy of Nutrition and Dietetics' "Kids Eat Right" logo on its single-sliced American cheeses products, prompting ridicule from Comedy Central host Jon Stewart and criticism from members of the health-professionals group who said it shouldn't have seemed to endorse the product.

Kraft has made headway revitalizing some older brands like Planters and Jell-O, but its efforts so far haven't sparked a turnaround in sales and profits.

The deal is noteworthy in terms of who helped put it together. There was only one financial adviser for each company, neither a bulge-bracket Wall Street bank.

Lazard was Heinz's exclusive financial adviser, while Cravath, Swaine & Moore and Kirkland & Ellis were its legal advisers. Centerview Partners LLC was Kraft's exclusive financial adviser, while Sullivan & Cromwell was its legal adviser.

Annie Gasparro contributed to this article.

Write to Chelsey Dulaney at [e-mail], Dana Cimilluca at [e-mail] and Dana Mattioli at [e-mail]

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