Heinz and Kraft have begun the process of merging to form what will be North America’s third largest food company and one of the world’s most significant packaging operations.
Warren Buffet's Berkshire Hathaway and 3G, Heinz's owners, will have a 51% stake in the combined firm, to be called The Kraft Heinz Company, with a 49% stake to be held by Kraft's existing shareholders. The proposed company would have revenue of about $35.7 billion (US$28 billion) a year. Pepsico, the world’s market leader, has annual revenue of roughly double that amount.
"This is my kind of transaction, uniting two world-class organisations and delivering shareholder value," Buffett, chairman and chief executive of Berkshire Hathaway, said in a statement.
There is no doubt that Kraft’s recent struggles to maintain its market position as consumers look for healthier foods has played a role in the decision. Kraft has overhauled its senior management over the past few months and has already stated its intention to develop products that meet changing consumer preferences.
The new company will have eight billion dollar brands and five others worth more than $500 million in sales.
It has an annual cost savings target of $1.9 billion (US$1.5 billion) by the end of 2017, which is also their target for making the deal “earnings-accretive.”
3G and Berkshire will fund the special dividend entirely out of their own pockets, to avoid any rise in Kraft’s debt level. They companies have stated their commitment to retaining the company’s investment-grade credit rating.
Heinz brands include Heinz signature Ketchup, baked beans, Ora-Ida potato products, Weight Watchers packaged foods and Philadelphia cream cheese. Kraft's portfolio includes Jell-O, Maxwell House coffee and Kool-Aid.
In Australia, former Kraft products such as Vegemite and Kraft Peanut Butter are now owned by Kraft spin-off, Mondelez, which is not involved in this deal.
The deal has been unanimously approved by the companies' boards of directors. If passed by the regulatory bodies, it will return Heinz to being a public company after Berkshire and 3G took it private in 2013 in a $28 billion acquisition. There are not expected to be any antitrust challenges because there is little overlap in the companies' products.
"By bringing together these two iconic companies through this transaction, we are creating a strong platform for both US and international growth," said Alex Behring, chairman of Heinz and the managing partner at 3G Capital.
Behring will become chairman of the new company. Bernardo Hees, currently Heinz’s chief executive, will become its chief executive officer. Kraft, chief executive officer, John Cahill, will become vice-chairman and will head a newly-formed operations and strategy committee.
