NEW YORK (Bloomberg) - Kraft Foods Group will merge with H.J. Heinz in a deal orchestrated by private equity firm 3G Capital and investment guru Warren Buffett, creating the fifth-largest food company in the world and North America's third-biggest.
Buffett's company, Berkshire Hathaway, and 3G will invest US$10 billion in the deal, which values Kraft at about US$46 billion, before net debt, based on its stock price Tuesday and the cash payment investors will receive. Kraft shareholders will receive 49 per cent of the stock in the combined entity, plus a cash dividend of US$16.50 a share.
The merger creates a stable of household names - everything from Heinz ketchup to Jell-O - with revenue of about US$28 billion. It also could presage more consolidation in the U.S. food industry, which is struggling to reignite growth. Buffett and 3G, the private-equity firm founded by Brazilian billionaire Jorge Paulo Lemann, previously teamed up to buy Heinz in 2013 and they cut costs, a strategy they aim to repeat with Kraft.
"3G has squeezed a lot out of Heinz and now they will do the same job at Kraft," said David Turner, an analyst at research firm Mintel. "When Buffett invests in a sector, it gives a sign that the sector is ripe for acquisitions. This will flag up other opportunities."
Kraft shares soared 36 per cent to close at US$83.17 in New York on Wednesday, the biggest one-day gain since the company split from Mondelez International Inc. more than two years ago. That gives Kraft a valuation of about US$49 billion.
The final transaction value is difficult to pin down, though, because Heinz is private and it also remains to be seen at what price the new company's shares will trade. The combined business, to be called Kraft Heinz Co., will have headquarters 1in Pittsburgh and the Chicago area, with current Heinz Chief Executive Officer Bernardo Hees staying at the helm. The new entity also will maintain Kraft's spot as a publicly held company.
Though Kraft kept the name of the original business when it split off Mondelez, it was smaller and relegated to the U.S. market. While Kraft has plenty of iconic brands, including Velveeta and Philadelphia Cream Cheese, the company hasn't been able to energize sales in a mature industry. Younger consumers in the U.S. have shown a preference for natural and organic ingredients - something Kraft has had to adjust to. In addition, rising commodity prices have squeezed the company.
The new combined company will be the third-largest food and beverage business in North America based on 2014 sales, behind only PepsiCo and Nestle, according to Heinz. With the merger, Kraft's products will benefit from Heinz's presence outside the U.S. The two companies also expect to trim US$1.5 billion in annual costs by the end of 2017.
"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."
"Short term doesn't make much difference for us because we will be in this stock forever," Buffett told CNBC on Wednesday. "I like the brands, I like the management, and we will see over time."
The billionaire has acquired and held stakes in a range of dominant consumer brands, including Coca-Cola Co. Buffett typically looks for targets that have strong brands, simple businesses and consistent earnings power.