Heinz, Kraft set to merge
Food giants, with a combined $28B in revenue, reach surprising deal
H.J. Heinz Co. is buying Kraft Foods, creating one of the largest food and beverage companies in the world with annual revenue of about $28 billion US.
The Kraft Heinz Co. will own brands such as Kraft, Heinz, Oscar Mayer, Ore-Ida and other brands. Eight of those brands have annual sales of $1 billion or more and five others log sales between $500 million and $1 billion every year.
The deal to bring together the two companies, each more than a century old, was engineered by Warren Buffett’s Berkshire Hathaway and Brazilian investment firm 3G Capital. The two will invest another $10 billion in the new company.
3G Capital is the company behind the takeover of Tim Hortons by Burger King last year. It joined forces with Berkshire Hathaway two years ago to buy Heinz in a deal valued at $23.3 billion.
Kraft Heinz will maintain headquarters in Pittsburgh, where Heinz is based, and also in the Chicago area, where Kraft resides.
The merger comes as well-established food producers struggle to keep up with shifting appetites. Consumers are seeking more unprocessed foods, and have migrated away from one-time staples of the American diet.
Buffett, however, said both companies have a strong base. He has been investing steadily in both of them for quite a while.
“I think the tastes Kraft and Heinz appeal to are pretty enduring,” Buffett said in a telephone call to the business news channel CNBC.
There are plans for at least four new products this year, Buffett said, and there is a lot of freedom to sell the company’s products outside of the U.S. and Canada.
Buffett said the massive deal materialized rapidly, having been in the works for only about four weeks or so.
Kraft shareholders will receive stock in the combined company and a special cash dividend of approximately $10 billion, or $16.50 per share. Each share of Kraft will be converted into one share of Kraft Heinz.
Kraft shares gained $21.06 or 34 per cent to $82.50 in premarket trade after the announcement. The stock closed at $83.17.
Current Heinz shareholders will own 51 per cent of the combined company, with Kraft shareholders owning a 49 per cent stake.
Heinz CEO Bernardo Hees will become CEO, Alex Behring, Heinz chairman and managing partner at 3G Capital, will be chairman. Kraft CEO and chairman John Cahill will become vice-chairman.
The deal still needs a nod from federal regulators as well as shareholders of Kraft Foods Group Inc., but the boards of both companies unanimously approved it. The planned closing is set for the second half of the year.
Annual cost savings estimated to be $1.5 billion are expected to be booked by the end of 2017.
Kraft Heinz plans to keep Kraft’s current dividend per share once the transaction closes. Kraft has no plans to change its dividend before the deal is complete.