The oracle of fries?
Ketchup maker H.J. Heinz Co, backed by Warren Buffett's Berkshire Hathaway Inc. and Brazilian private equity firm 3G Capital, will combine with Kraft Foods Group Inc. to create the third-largest North American food company, executives said on Wednesday.
Shares of Kraft, known for its namesake macaroni and cheese in a box, as well as Velveeta, Maxwell House coffee and Oscar Mayer processed meats, were up 35 percent at $82.88 in afternoon trading.
The deal deepens Buffett's hold on leading U.S. food brands, as well as that of 3G founder Jorge Paulo Lemann,Brazil's richest man. The two teamed up to buy control of Heinz in 2013 and collaborated on the 2014 merger of fast-food chain Burger King and Tim Hortons Inc, which runs coffee and doughnut shops.
Food industry experts see Kraft benefiting from Heinz's international presence, which generates more than 60% of its sales. Kraft brands are in 98% of North American households, the companies said, but would have a greater opportunity to expand overseas.
The combined company, which will be publicly traded under the name Kraft Heinz Co, expects to save about $1.5 billion in annual costs by the end of 2017. 3G has a reputation for introducing aggressive cost cuts and improving efficiencies at other companies it has invested in, including Heinz andAnheuser-Busch InBev.
"Mature businesses look for cost cutting. 3G takes cost cutting to a different level," said Bob Goldin, executive vice president at food industry consultant Technomic. Goldin noted that neither Kraft nor Heinz are major players in the sector's growth segments, from organic to fresh foods.
The deal calls for the exchange of each Kraft share for one share in the combined Kraft Heinz Co, plus a special cash dividend of $16.50 per share to existing Kraft shareholders. The $10 billion behind the special dividend will be funded by an equity investment by Berkshire Hathaway and 3G.
Heinz shareholders will own 51% of the combined company and Kraft shareholders the rest. Heinz did not disclose exactly how high Kraft was valued in the deal, but its executives estimate the combined company will have an enterprise value of over $100 billion.
Packaged-food makers from Kraft to General Mills and Kellogg are battling sluggish demand as consumers shift to brands that are perceived as healthier, including foods that are organic or less processed.
Kraft's efforts to revamp its own products, such as combining its higher-protein snacks like meat and nuts into one container called the P3 pack, have not shifted the tide enough.
In December, Kraft named John Cahill as chief executive, who acknowledged the company has not changed enough in the face of shifting consumer tastes. Cahill overhauled his leadership team last month, announcing the exit of three senior executives.
Cahill said on a call with analysts that 3G Managing Director Alex Behring approached him at the end of January about a possible deal. The discussions picked up in the second half of February.