Shares of Kraft Foods Group, Inc. KRFT reached an all-time high of $89.84 on Mar 27, after it announced a definitive merger agreement with privately owned ketchup maker, H.J. Heinz Company, to form The Kraft Heinz Company, earlier in the week.
Shares of the food company have risen almost 45% since it announced the Heinz merger deal. The deal is being backed by Brazilian private equity firm, 3G Capital, and billionaire investor, Warren Buffet.
The deal has been approved by the boards of both the companies and is subject to shareholders’ approval, regulatory approvals and customary closing conditions.
Once combined, the Kraft Heinz Company will be the third largest food and beverage company in North America and the fifth largest in the world. The merger is reportedly valued at $46 billion.
Heinz is jointly owned by 3G Capital and Buffet’s Berkshire Hathaway, Inc. BRK.B. The investment companies acquired Heinz for $28 billion in 2013.
Kraft shareholders will own 49% stake in the combined entity while receiving a special cash dividend of $16.50 per share that represents 27% of Kraft’s closing price on Tuesday. Kraft shareholders will get one share of Kraft Heinz against every Kraft share they own. The $10 billion special dividend to be paid to Kraft shareholders will be funded by an equity contribution by Berkshire Hathaway and 3G Capital. Heinz shareholders will own 51% stake in the new company.
Kraft has been struggling with its top line ever since it split from Mondelez International, Inc. MDLZ in 2012 due to broader macro pressures. Several of the Zacks Rank #3 (Hold) company’s product categories have been soft for the past few quarters due to lack of innovation, lower consumption and stiff competition. Kraft, like many other U.S. food producers, has struggled due to shifting consumer’s preference toward natural and organic ingredients over packaged and processed food.
Additionally, Kraft’s business is squarely focused on North America and, unlike some of its peers, it lacks exposure in some of the fast-growing emerging markets. The merger is expected to result in revenue synergies like increased scale and resultant additional shelf space and provide opportunity for Kraft’s brands to set foot in the overseas markets using Heinz’s international platform.
The merger will bring popular consumer food brands like Heinz, Kraft, Oscar Mayer, Ore-Ida and Philadelphia under one roof. Kraft Heinz will own eight Billion Dollar brands and is expected to garner approximately $28 billion in revenues. Kraft Heinz is also expected to save $1.5 billion in annual costs by 2017-end gaining from increased scale and possibly aggressive cost cuts. It is being widely speculated that the merger may lead to heavy job cuts at both Kraft and Heinz.
3G Capital, co-founded by Brazilian billionaire Jorge Paulo Lemann, is a global investment firm known for buying iconic brands and then growing them while aggressively slashing costs. It held approximately 70% stake in fast food chain, Burger King, before merging it with Canadian doughnut chain, Tim Hortons, to form Restaurant Brands International QSR, last year. In 2008, 3G Capital took over American brewer, Anheuser-Busch and merged it with Belgian-Brazilian brewer, InBev to form Anheuser-Busch InBev SA/NV, the world’s largest brewer. 3G Capital had a significant stake in InBev.
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