Kraft and Heinz to merge backed by Warren Buffett and 3G Capital

Last Wednesday (March 25, 2015), it was announced that Kraft Foods Group and H.J Heinz would merge in a deal backed by Warren Buffett and 3G Capital. The deal is expected to be valued above $45 billion and it is expected to become final on June 30.  3G Capital, a Brazilian investment and management group combined with Berkshire Hathaway in 2013 to buy Heinz for $28 billion.

The merger will create the world’s fifth-biggest food and beverage company. The new company will be called “The Kraft Heinz Co.”. The new company will have revenues of approximately of $28 billion. It will have over 45,000 employees. Kraft shareholders are very happy because they will receive a special cash dividend of $16.50 per share and stock representing 49% of the new company. Existing Heinz shareholders will own 51%. Berkshire Hathaway and 3G Capital will invest $10 billion to fund the special dividend. The new company’s enterprise value is around $110 billion.

As Warren Buffett always buys businesses that he understands, he clearly understand the food industry. Plus, the food industry is a “need” for all of us, in order to survive.  Following the announcement of the deal, Buffett mentioned in a CNBC that that he plans to own Kraft and Heinz “forever”. Berkshire Hathaway is going to be the largest shareholder of the new company.  Berkshire Hathaway will own over 320 million shares of the new company. Kraft’s (KRFT) outstanding shares will increase after the deal.

Consumer packaged goods are very competitive world. Customers, including me are price sensitive. Kraft has $18 billion in annual sales and Heinz has $11 billion in annual sales. The merger will give the new company the advantage over the competitors. Kraft’s majority of sales are in the United States. Heinz’s majority of sales are outside the United States. The deal will help increase Kraft’s sales by using Heinz’s international resources. Kraft will be able to open new markets aboard for Kraft, increasing Kraft’s revenue.

On CNBC, Buffett said that Berkshire would stay invested in Kraft Heinz “forever” and that he views their food brands as enduring. Berkshire will own about 320 million shares of the combined company’s 1.2 billion shares. Their per-share value will be determined by the stock market when they are issued.

Remember that deal has to be approved by Kraft shareholders and federal regulators, before it becomes final. I strongly believe Kraft shareholders will approve this deal because Kraft (KRFT) shares rose after the announcement. I’m not sure about federal regulators. Federal regulators might look this at a “monopoly” and not approve the deal because it reduces the competition.

Investors loved the deal. Kraft’s shares (KRFT) rose about 36% on a heavy volume. It’s currently around $89. I would not buy the stock at this time because it’s little bit expensive and the deal is not final yet.


Kraft (KRFT) - Daily
Kraft (KRFT) – Daily