Kraft Foods (KRFT) Surges; Heinz Offers Big Premium

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The shares of Kraft Foods are trading higher after announcing its merger with H.J. Heinz Company.

The stock price of Kraft surged more than 37% to $84.14 per share at the time of this writing, around 11:08 A.M. in New York. Its market capitalization is now nearly $49 billion.

Details of the merger agreement

According to Kraft, its merger with Heinz will create the third largest food and beverage company in North America.

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Under the terms of the agreement, the shareholders of Kraft will own 49% of the combined company. They will receive a stock in the combined company and a special dividend of $16.50 per share, which represents 27% of Kraft’s closing price on March 24.

On the other hand, the current shareholders of Heinz will own 51% of the combined company. Warren Buffett’s Berkshire Hathaway and 3G Capital will fund the total special dividend payment of approximately $10 billion.

Buffett said, “This is my kind of transaction, uniting two world-class organizations and delivering shareholder value. I’m excited by the opportunities for what this new combined organization will achieve.”

The Kraft Heinz Company

The combined company will be named The Kraft Heinz Company. It will have eight $1billion plus brands and five brands between $500 million and $1 billion. Its two portfolios of brands include Heinz, Kraft, Oscar Meyer, Ore-Ida, and Philadelphia.

The Kraft Heinz Company is committed to maintaining an investment grade rating and intends to maintain Kraft’s current dividend per share. It is expected to increase over time.

Kraft Foods emphasized that the merger offers significant synergy opportunities with a strong platform for organic growth in North America and global expansion.

In a statement, Kraft Chairman and CEO John Cahill said, “This combination offers significant cash value to our shareholders and the opportunity to be investors in a company very well positioned for growth, especially outside the United States, as we bring Kraft’s iconic brands to international markets. We look forward to uniting with Heinz in what will be an exciting new chapter ahead.”

On the other hand, Heinz Chairman and Managing Partner at 3G Capital, Alex Behring said, “By bringing together these two iconic companies through this transaction, we are creating a strong platform for both U.S. and international growth. Our combined brands and businesses mean increased scale and relevance both in the U.S. and internationally.”

Behring will serve as chairman of The Kraft Heinz Company following the completion of the deal. Cahill will serve as vice chairman. He will also serve as chairman of the newly created operations and strategy committee of the board of directors.

Analysts from Stifel Nicholas note:

Investor speculation around 3G’s next target has been rampant ever since the acquisition of Heinz in 2013 . We highlight below our grid outlining the large-cap food companies and some of the key metrics we believe 3G would assess in selecting its next target. The factors we outline below indicate that Kraft screens well in terms of being atarget for 3G Capital. While there is little differentiation amongst the top four companies we highlight below (Kraft, Campbell Soup, General Mills, and Mondelez), Kraft moved to the top of our list back in December as CEO Tony Vernon resigned from his position and John Cahill, Chairman of the Board, took over as CEO. Mr. Cahill announced several management changes and indicated on the fourth quarter earnings call a desire to accelerate the restructuring of the business. While Kraft had already succeeded in reducing its overhead to an industry-leading level, we believe 3G could very well cut this significantly from the current level. In addition, 3G has proven to be very proficient at managing the supply chain capable of driving the gross margin for Kraft well above its food industry peers.


So, why Kraft Foods Group? Beyond the cost cutting opportunity likely present at all large food companies (at least in relation to the way 3G runs a company), 3G and Mr. Buffett have shown a desire to own leading market share brands and particularly those with high relative market shares that could succeed even with a pullback in promotional and marketing support. Kraft epitomizes this opportunity, in our opinion. 3G typically prefers companies with an international growth opportunity especially in the emerging markets. And, while we do not believe Kraft provides much of an international opportunity, it seems to fit many of the other criteria 3G prefers in a business. We believe the timing is right to buy Kraft now – Heinz is being indoctrinated into the 3G discipline with significant margin improvement and a lower debt ratio, interest rates remain low (and, could be headed up in the near future), and the change in management at Kraft provides an opportunity for 3G to purchase the business.

Kraft Heinz Company Infographic

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