One investment firm duo is changing the face of the American food industry, and it made its biggest move yet this week.
Heinz and Kraft, two of the largest, best known food companies in the United States, announced Wednesday that they would merge in a megadeal engineered by 3G Capital, a Brazilian investment firm, and billionaire Warren Buffett’s Berkshire Hathaway. The merger would create the third-largest food and beverage company in the country (after PepsiCo and Tyson) and the fifth-largest on earth, with a vast stable of household brand names including Oscar Mayer, Ore-Ida, and Philadelphia cream cheese. Both companies’ boards of directors, according to a joint statement, unanimously approved the deal.
“I am delighted to play a part in bringing these two winning companies and their iconic brands together,” Mr. Buffett said in the statement. “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.”
Under the terms of the deal, current Kraft shareholders will own 49 percent of the newly-created company, and Heinz shareholders will own 51 percent. The news thrilled investors; Kraft stock surged nearly 40 percent in Wednesday morning trading.
Bringing Kraft and Heinz together is just the latest, and largest, in a series of moves by Berkshire Hathaway and 3G to bring a large swath of America’s food companies under their purview. In June 2013, the group bought Heinz for $23 billion and took the company private. It was the biggest deal of its kind until today’s, which analysts estimate is worth between $35 billion and $40 billion.
In August of last year, Buffett helped finance a deal for 3G-owned Burger King to buy Canadian chain Tim Horton’s for $11.4 billion. The newly formed company moved its headquarters to Canada, sparking a debate over the tax obligations of American companies that move abroad for lower tax bills. In the lead-up to Wednesday’s announcement, other major food names, including Kellogg’s, PepsiCo, and Campbell Soup Co., were being pegged as possible future acquisition targets for 3G Capital.
Separately, Berkshire Hathaway also owns Dairy Queen and a major stake in Coca-Cola.
Consolidations and sell-offs, as when Kraft spun off its snack business into a separate company in 2012, have become commonplace in an industry that is struggling to adapt to changing tastes. Companies like Kellogg’s and Kraft tread primarily in processed foods, with little recourse as Americans increasingly turn toward more natural, organic products and eschew products like fast food and soda in increasing numbers. As detailed in the Wall Street Journal, both Kellogg’s and Kraft reported losses last quarter. Kraft, particularly, has had a rough go, resulting in the surprise exit of its chief executive at the end of 2014.
Those issues have been big opportunities for Berkshire Hathaway and 3G to swoop in and cut costs. The Heinz purchase and reorganization resulted in about 600 company layoffs. The Kraft-Heinz merger should also involve some cost-cutting, including possible layoffs and sell-offs of some of the company’s less profitable brands.
“3G has squeezed a lot out of Heinz and now they will do the same job at Kraft,” David Turner, an analyst at research firm Mintel, told Bloomberg. “When Buffett invests in a sector, it gives a sign that the sector is ripe for acquisitions. This will flag up other opportunities.”
The newly formed Kraft-Heinz company will have about $28 billion in annual revenue. Eight of the company’s brands each generate at least $1 billion a year; another five make between $500 million and $1 billion apiece, according to the Wednesday announcement.
Correction: An earlier version of this story reported that Berkshire Hathaway held stake in the Mars Candy Company. Berkshire sold its stake back to the Mars family in 2008.