By Dana Mattioli and Dana Cimilluca
One of the biggest challenges for would-be corporate acquirers
is convincing their takeover prey to make a deal. When 3G Capital
Partners LP came knocking on Kraft Foods Group Inc.'s door early
this year, however, the deal-hungry Brazilian investment firm was
welcomed.
In a meeting in late January in the Chicago area, 3G managing
partner Alex Behring met with Kraft Chief Executive John Cahill and
broached the idea of a takeover, people familiar with the matter
said. Mr. Cahill, who had become CEO in December as part of a
shake-up at the food company, was already in the process of pulling
pages from 3G's playbook--namely, through aggressive cost-cutting.
3G, for its part, saw the abrupt change in management as an
opening, one of the people said. Mr. Cahill indicated he was
receptive to the approach, the people said.
Mr. Cahill proceeded to take the idea to his board, which at a
two-day meeting in late February decided it would pursue a sale of
the company to 3G, the people said. The negotiations were
relatively smooth from there, even around so-called social
issues--which generally refer to who will fill executive roles at a
merged company, they said.
What ensued was a one-month march to negotiate a tie-up,
announced Wednesday, in which 3G will acquire Kraft and meld it
with H.J. Heinz Co., another household name in U.S. food it bought
two years ago. As with the Heinz deal, 3G brought in Warren
Buffett's Berkshire Hathaway Inc. for financial backing. Bernardo
Hees, CEO of Heinz, will run the new company.
The roughly $49 billion Kraft deal, the largest merger announced
so far this year, promises to reshape the food industry and could
send rivals scrambling to shore themselves up with tie-ups of their
own.
Kraft shareholders also welcomed the deal, sending stock of the
company up 36% on the news. Once it closes, Kraft Heinz Co., as it
will be known, will trade publicly. That would allow Kraft
shareholders to benefit from any cost savings 3G manages to reap
from meshing the companies--in this case forecast at $1.5 billion a
year--and from the stewardship of Mr. Buffett. The widely respected
investor will contribute about $5 billion to the purchase, as will
3G. The cash is earmarked for a $10 billion special dividend to
Kraft shareholders that will enable 3G to remain in control.
The unusual deal structure stems in part from the fact that
buying all of Kraft may have been too much of a stretch, even for
3G and Mr. Buffett. The Northfield, Ill., company had a $37 billion
market value as of the close of trading Tuesday, before The Wall
Street Journal reported news of the deal. In an indication of the
price for Kraft in the complicated transaction, its market value
soared to $49 billion Wednesday.
3G has consolidated the consumer and fast-food industries at a
breakneck pace, striking some of the biggest takeover deals in
recent years. Last year, it bought Canadian coffee-and-doughnut
restaurant chain Tim Hortons Inc. for $11 billion. The year before,
it bought Heinz for $23 billion. A few years earlier, 3G took
Burger King Worldwide Inc. private.
The firm's aggressive cost-cutting has put competitors in the
food industry on edge. A number of them have rushed to cut costs
with the knowledge that they could be 3G's next target. 3G also
looked at cereal makers General Mills Inc. and Kellogg Co.,
according to people familiar with the matter.
In February, Campbell Soup Co. announced plans to slash costs
and adopt zero-based budgeting, a cost-control practice that 3G is
known for using. Before stepping down, Kraft's former CEO said: "We
continue to make progress in our quest to redefine lowest-cost
overheads in the industry...the reality, however, is that with the
likes of 3G now in our space, best-in-class overheads keep getting
better and we have more work to do."
Merger advisers predicted Wednesday that the Kraft takeover
could put others in the food industry in full deal-making mode as
they rush to strike combinations that could help them emulate 3G's
success and keep pace competitively with Kraft Heinz. On Wednesday,
the stocks of Kellogg, General Mills and ConAgra Foods Inc. all
rose.
In addition to underscoring what a force 3G and Mr. Buffett now
are in the deal-making landscape, the Kraft sale is the latest sign
that the merger market is in the midst of a major expansion. There
have been $802 billion of mergers announced globally this year,
according to Dealogic, a 15% increase over the same period in 2014,
one of the biggest years for deal-making ever.
The Kraft deal is a reminder of the increasing deal-market power
of so-called boutique investment banks like Centerview Partners
LLC, which advised Kraft. Centerview and Lazard, another relatively
small, independent investment bank with a broad industry focus,
were the only financial advisers on the deal. The transaction is
expected to generate more than $100 million in adviser fees.
In a sign of the importance of the deal for Wall Street, shares
of Lazard, 3G's longtime adviser, rose 2.2% Wednesday. Centerview
is closely held.
Write to Dana Mattioli at dana.mattioli@wsj.com and Dana
Cimilluca at dana.cimilluca@wsj.com
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