By Dana Cimilluca, Dana Mattioli and Chelsey Dulaney
Kraft Foods Group Inc. and H.J. Heinz Co., with help from its
owner 3G Capital Partners L.P. and Warren Buffett's Berkshire
Hathaway Inc., have agreed to merge in a deal that would create the
world's fifth largest food and beverage company.
The combined company, which will be called the Kraft Heinz Co.,
will have revenue of about $28 billion and include well-known
brands like Jell-O, Maxwell House coffee and Planters nuts. The
deal comes as Kraft and other major U.S. food makers struggle with
changes in consumer tastes that have hampered their ability to sell
packaged, processed food.
The Wall Street Journal was first to report late Tuesday that
the two companies were in talks, with a deal likely to top $40
billion.
Shares of Kraft surged 32% in morning trading to $80.84.
Heinz shareholders will hold a 51% stake in the combined
company, while Kraft shareholders will hold a 49% ownership stake.
Kraft shareholders also will receive a special dividend of $16.50 a
share, representing 27% of Kraft's closing price on Tuesday.
The new company's shares would trade publicly, according to a
statement announcing the deal. Berkshire and 3G also indicated they
don't intend to sell their stakes in the new company any time soon,
saying they "are committed to long-term ownership of the Kraft
Heinz company."
Mr. Buffett said on CNBC that Berkshire would own about 320
million shares in the new company. He added that the deal had been
in the works for about four weeks.
On whether the deal's structure is attractive enough for Kraft
shareholders, Mr. Buffett said, "So far it looks like they like it,
and if they don't like it, they can probably sell it for a lot more
than perhaps Kraft could have been sold to anybody else."
Under the deal's terms, Berkshire and 3G Capital will provide
the $10 billion to fund the special dividend. In 2013, 3G teamed up
with Mr. Buffett to buy U.S. ketchup maker Heinz for $23
billion.
3G, an acquisitive Brazilian firm known for buying consumer
companies it considers bloated and aggressively slashing costs, has
been looking for targets after it recently raised some $5 billion
for deal making.
Annual cost savings from the Kraft and Heinz combination could
reach $1.5 billion by the end of 2017, the companies said
Wednesday.
3G has become a major player in the U.S. food sector.
Billionaire co-founder Jorge Paulo Lemann was a big shareholder in
brewer InBev and helped engineer its 2008 acquisition of
Anheuser-Busch.
In 2010, 3G took private fast-food restaurant Burger King
Worldwide Inc. Last year, 3G bought Canada's coffee-and-doughnut
retailerTim Hortons Inc. through its Burger King holding. The $11
billion deal was financed in part by Mr. Buffett.
Alex Behring, chairman of Heinz and managing partner at 3G
Capital, will become the chairman of Kraft Heinz, and Bernardo
Hees, chief executive of Heinz, will be the CEO. John Cahill, Kraft
chairman and CEO, will become vice chairman, and the board of
directors will consist of five members appointed by the current
Kraft board, as well as the current Heinz board, including three
members each from Berkshire and 3G Capital.
Kraft today is a mostly U.S. food conglomerate whose brands
include Oscar Mayer deli meats and Kool-Aid in addition to its
namesake cheese products. The company has struggled of late,
buffeted by changes in consumer tastes and other factors that have
challenged many of the biggest and most established packaged-food
companies.
Kraft's revenue last year was effectively flat at $18 billion,
while net profit fell 62% to $1 billion, in part because of higher
commodity costs and big charges related to post-employment benefit
plans. The company has said it lost market share in 40% of its U.S.
businesses and was flat in the rest.
Today's Kraft was born in a huge corporate split in 2012, when
it was spun off by its namesake, leaving an international snacks
company now called Mondelez International Inc.
Kraft has touted its leaner cost structure compared with other
packaged food companies, having cut jobs and eliminated other
costs. But it is still highly vulnerable to the changes in consumer
tastes.
As people shift to buying fresher foods they perceive as
healthier, Kraft has attempted to adapt by taking artificial
coloring out of some of its cheeses. It also has trumpeted a
high-protein snack pack called P3--which combines meat, cheese
cubes, and nuts--sold by its Oscar Mayer brand.
Another recent effort stirred controversy: Kraft struck a deal
to put The Academy of Nutrition and Dietetics' "Kids Eat Right"
logo on its single-sliced American cheeses products, prompting
ridicule from Comedy Central host Jon Stewart and criticism from
members of the health-professionals group who said it shouldn't
have seemed to endorse the product.
Kraft has made headway revitalizing some older brands like
Planters and Jell-O, but its efforts so far haven't sparked a
turnaround in sales and profits.
The deal is noteworthy in terms of who helped put it together.
There was only one financial adviser for each company, neither a
bulge-bracket Wall Street bank.
Lazard was Heinz's exclusive financial adviser, while Cravath,
Swaine & Moore and Kirkland & Ellis were its legal
advisers. Centerview Partners LLC was Kraft's exclusive financial
adviser, while Sullivan & Cromwell was its legal adviser.
Annie Gasparro contributed to this article.
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com, Dana
Cimilluca at dana.cimilluca@wsj.com and Dana Mattioli at
dana.mattioli@wsj.com
Corrections & Amplifications
Kraft Foods Group shareholders will receive a special dividend
of $16.50 a share, representing 27% of Kraft's closing price on
Tuesday. An earlier version of this story misstated the percentage
as a premium.
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