3G Capital, the private-equity firm founded by Brazilian billionaire Jorge Paulo Lemann, agreed to acquire Kraft Foods Group Inc. in partnership with Warren Buffett’s Berkshire Hathaway Inc. and merge it with H.J. Heinz.
Kraft shareholders will receive 49 percent of the stock in the combined company, plus a special cash dividend of $16.50 a share, the companies said in a statement Wednesday. Berkshire and 3G will invest another $10 billion in the combined company, which will be known as Kraft Heinz Co., headquartered in Pittsburgh and the Chicago area, and led by Heinz Chief Executive Officer Bernardo Hees.
The deal will create the world’s fifth-largest food company with revenue of about $28 billion and could presage more consolidation in the lagging U.S. food industry. Kraft’s brands will benefit from Heinz’s presence outside the U.S., while opportunities exist to trim $1.5 billion in annual costs by the end of 2017, the companies said.
“3G has squeezed a lot out of Heinz and now they will do the same job at Kraft,” David Turner, an analyst at researcher Mintel, said in an interview. “When Buffett invests in a sector, it gives a sign that the sector is ripe for acquisitions. This will flag up other opportunities.”
Kraft traded at the equivalent of $75.78 at 12:12 p.m. in Frankfurt, valuing the company at about $45 billion.
The current Kraft was created in a spinoff from Mondelez International Inc. in October 2012. Mondelez inherited the company’s overseas snack businesses, giving it bigger growth opportunities internationally. Kraft, meanwhile, is focused on the U.S. While Kraft has a stable of household brands, including Velveeta and Philadelphia Cream Cheese, the company has struggled to reignite sales growth in a mature market.
“This is my kind of transaction, uniting two world-class organizations and delivering shareholder value,” Buffett said in the statement. “I’m excited by the opportunities for what this new combined organization will achieve.”
Alex Behring, chairman of Heinz and the managing partner at 3G Capital, will become chairman of the new company after the closing of the deal, which is expected to take place in the second half of this year. John Cahill, Kraft chairman and CEO, will become vice chairman and chair a newly-formed operations and strategy committee of the board of directors. A new executive team for the combined global company will be announced during the transition period, they said.
Kraft management also has been in turmoil in recent months. CEO Tony Vernon stepped down in December, with Chairman John Cahill taking over the job. Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis, speculated at the time that Vernon was pushed out due to poor performance. The company’s top finance and marketing executives also left in February, and Kraft added the role of chief operating officer.
Younger consumers in the U.S. have shown a preference for natural and organic ingredients -- something Northfield, Illinois-based Kraft has had to adjust to. In addition, rising commodity prices have squeezed the company, according to Yarbrough.
The company also had an embarrassing product recall this month after customers found metal pieces in its hallmark Macaroni and Cheese. Kraft recalled 6.5 million boxes of the product.
Berkshire Hathaway teamed up with 3G Capital two years ago to acquire Heinz and then helped finance 3G-owned Burger King Worldwide Inc.’s purchase of Canadian coffee-and-doughnut chain Tim Hortons Inc.
Since those deals, speculation has simmered about what they’ll buy next -- be it Kellogg Co., Kraft or Mondelez. Buffett stoked the conversation with his annual letter to Berkshire shareholders, saying he expects to “partner with 3G in more activities.”
Berkshire has been a longtime investor in Kraft, tracing back to a stake in its predecessor company, part of Buffett’s investments in well-known consumer businesses. Buffett has acquired and held stakes in a range of dominant consumer brands, including Coca-Cola Co. The billionaire began paring his stake in Kraft Foods Inc. in 2010 after disagreeing with Kraft’s decision to sell its pizza brands to help pay for a takeover of Cadbury Plc.
Buffett criticized then-Kraft CEO Irene Rosenfeld for the Cadbury transaction and the sale of the pizza businesses. “Both deals were dumb,” he told Berkshire investors at the time. Berkshire was the biggest shareholder of Kraft with a stake valued at $3.3 billion at the end of December 2010.
Buffett looks for targets that have strong brands, simple businesses and consistent earnings power.
3G is known for squeezing costs out of its acquisitions and cutting jobs. Kraft had 22,100 employees at the end of last year, though that number was down almost 1,000 from two years earlier.
3G disclosed in a November regulatory filing that it is raising a fourth special situations fund, without identifying the fund’s size. A person with knowledge of the matter said earlier this year it will be about $5 billion.
Bankers from Lazard Ltd. advised Heinz, while Cravath, Swaine & Moore and Kirkland and Ellis acted as legal advisers. Centerview Partners LLC served as adviser for Kraft, and Sullivan & Cromwell acted as legal adviser.