Heinz and Kraft merge: why America's biggest food brands are shrinking

Kraft and Heinz confirmed Wednesday that they would join forces to form the third-largest  food and beverage company in the US. The $40 billion deal between Kraft and Heinz is just the latest in a series of big-ticket consolidations among America's biggest food brands. 

Rick Wilking/Reuters/File
Commemorative ketchup bottles with portraits of Warren Buffett on display at an exhibition of Berkshire Hathaway companies. Kraft Foods Group Inc, the maker of Velveeta cheese, will merge with ketchup maker H.J. Heinz Co, owned by 3G Capital and Warren Buffett's Berkshire Hathaway Inc, to form North America's third-largest food and beverage company.

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. 

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.