Heinz deal for Kraft expands food larder for Buffett, 3G

Wed Mar 25, 2015 5:50pm EDT
 
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By Anjali Athavaley and Sruthi Ramakrishnan

(Reuters) - Ketchup maker H.J. Heinz Co, backed by Warren Buffett's Berkshire Hathaway Inc (BRKa.N: Quote) and Brazilian private equity firm 3G Capital, will combine with Kraft Foods Group Inc KRFT.O in a $46 billion deal 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, closed up nearly 36 percent at $83.17.

The deal gives Buffett more 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 percent of its sales. Kraft brands are in 98 percent 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 and Anheuser-Busch InBev NV (ABI.BR: Quote).

"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 percent of the combined company and Kraft shareholders the rest. The transaction is worth about $46 billion for Kraft shareholders, based on Kraft's market capitalization of $36 billion on Tuesday before news of the deal emerged plus the special dividend.   Continued...

 
A Heinz Ketchup bottle and a bottle of Kraft parmesan cheese are displayed in a grocery store in New York March 25, 2015. REUTERS/Eduardo Munoz