Kraft in Talks to be Acquired by 3G Capital -- 4th Update

By Dana Cimilluca, Dana Mattioli and Annie Gasparro

Private-equity firm 3G Capital Partners LP is in advanced talks to buy Kraft Foods Group Inc. in a deal likely to be valued at upwards of $40 billion, according to people familiar with the matter.

The investment firm would use H.J. Heinz Co., which it acquired two years ago, to make the investment, said one of the people, effectively merging the two well-known food companies.

A tie-up could be announced soon, said one of the people. It is possible the talks could fall apart before a deal is reached.

Kraft had a market value of roughly $37 billion, before The Wall Street Journal reported news of the possible deal late Tuesday. While it's not clear what price the two sides are negotiating, given typical premiums paid in takeover deals, a sale of the food company could be valued at well over $40 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.

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 2013, 3G teamed up with Warren Buffett to buy U.S. ketchup maker Heinz for $23 billion.

In 2010, 3G took private fast-food restaurant Burger King Worldwide Inc. Last year, 3G bought Canada's coffee-and-doughnut retailer Tim Hortons Inc. through its Burger King holding. The $11 billion deal was financed in part by Mr. Buffett.

Kraft today is a mostly U.S. food conglomerate whose brands include Oscar Mayer deli meats and Maxwell House coffee 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.

In December, Kraft unexpectedly named a new chief executive to replace Tony Vernon, a then-58-year-old who had been in the job for just over two years. A board member said at the time the company felt the need to accelerate the pace of change. Kraft Chairman John Cahill, then 57, took over as CEO. After years of working at PepsiCo Inc. and Pepsi Bottling Group Inc., Mr. Cahill served as a partner at private-equity firm Ripplewood Holdings from 2008 to 2011 before joining Kraft, and analysts speculated that he might be more open to deal making.

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. Mondelez took on what were thought to be faster-growing global brands, such as Oreo and Ritz., but it struggled initially, in part because of difficulty digesting Cadbury chocolates, which it had bought prior to the split.

But Mondelez quickly turned to an aggressive cost-cutting plan, and brought activist investor Nelson Peltz on its board--a move that relieved the pressure he had been putting on the company to consider merging with PepsiCo's snack business.

Kraft has touted its leaner cost structure compared with other packaged food companies, having cut jobs and eliminated other costs. But it's 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. "I don't think Kraft has done as aggressive of a job in this regard as we need to," Mr. Cahill said on a conference call last month, adding that Kraft needs to improve the quality of its food and the effectiveness of its marketing and innovation.

While 3G is an investment firm, it has a different fundraising approach than most of its peers. The firm, formed in 2004, instead turns to a small group of the world's wealthiest investors, including Mr. Buffett and Pershing Square Capital Management LP's William Ackman.

3G uses a process called "zero-cost budgeting," where each division of a company must justify its costs from scratch each year. Shortly after acquiring Heinz, for instance, 3G moved to close plants across the country and eliminated more than 1,000 jobs.

In February, Campbell Soup Co., thought to be another potential 3G target, announced plans to slash costs and adopt zero-based budgeting.

Unlike with typical private-equity firms, 3G's founders like to invest for longer than the standard five-to-seven-year timeframe.

Write to Dana Cimilluca at dana.cimilluca@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

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