H.J. Heinz Co. is buying Kraft Foods Group Inc. in a deal to make one of the largest food services companies in the world.
The deal was engineered by Heinz's owner, the Brazilian investment firm 3G Capital, and billionaire investor Warren Buffett's Berkshire Hathaway. 3G Capital is the company behind the takeover of Tim Hortons by Burger King last year.
The combined company would have revenues of $28 billion US a year, enough to make it the fifth-largest food company in the world.
Publicly traded Kraft has a market cap of $36 billion. When it was taken private in 2013 by 3G and Berkshire, Heinz was valued at $23 billion, which suggests the total value of the combined company could be as much as $60 billion.
Heinz shareholders will be majority owners of the merged company and Kraft shareholders will receive stock in the combined company and a special cash dividend of approximately $10 billion US, or $16.50 per share.
Kraft shares closed on Tuesday at $61.33 and rose by about 25 per cent to $77.02 in pre-market trading after the deal was announced.
Current Heinz shareholders will own 51 per cent of the combined company, with Kraft shareholders owning 49 per cent.
The combined company's brands will include:
- Heinz tomato ketchup.
- Oscar Mayer.
- Philadelphia cream cheese.
- Cheez Whiz.
- Claussen pickles.
- Lea & Perrins.
Both companies' boards have unanimously approved the deal, which is targeted to close in the second half of the year. It still needs approval from Kraft shareholders.
The early plans outlined by Kraft and Heinz executives in a conference call Wednesday focused largely on the cost efficiencies that would be achieved through the deal, rather than the potential for sales growth in North America. They said they expect to save $1.5 billion through moves such as combining manufacturing and distribution networks, as well as using the newly created company's scale to negotiate better prices for ingredients.
John Cahill, CEO of Kraft, noted that the new management would drive a "much leaner organization," as was the case when 3G took over Heinz. He said 3G can "make this happen deeper and faster."
"What we have not been thrilled about is some of our execution," Cahill said.
Michael Moss, author of Salt Sugar Fat, sees this as a classic Buffett takeover.
“He’ll go in and he’s going to kill off the products that aren’t performing well. He’s going to slash expenses,” he said in an interview with CBC’s The Exchange with Amanda Lang.
There will be layoffs – as many as 5,000 and then enhanced marketing, particularly for international markets, Moss said.
“What I don’t see is this speaking to the growing consumer demand for truly healthier profits and the pressure that all the major food companies are coming under increasingly to deliver on that demand,” he said.