By Chelsey Dulaney, Dana Cimilluca, Dana Mattioli and Annie Gasparro
Kraft Foods Group Inc. and H.J. Heinz Co. have agreed to merge
in a deal that will create the world's fifth largest food and
beverage company.
The deal comes as Kraft and many 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 that the two
companies were in talks on late Tuesday, with a deal likely to top
$40 billion.
The combined company, which will be called The Kraft Heinz Co.,
will have revenue of $28 billion and will hold a portfolio of
brands including Heinz, Kraft, Oscar Mayer, Ore-Ida and
Philadelphia. Annual cost savings from the combination could reach
$1.5 billion by the end of 2017, the companies said.
Shares of Kraft surged around 24% in premarket trading.
Heinz shareholders will hold a 51% stake in the combined
company, while Kraft shareholders will hold a 49% ownership stake.
Kraft shareholders will also receive a special dividend of $16.50 a
share, representing 27% of Kraft's closing price on Tuesday.
Under the terms of the deal, Warren Buffett's Berkshire Hathaway
Inc. and private-equity firm 3G Capital Partners LP will provide
the $10 billion to fund the special dividend.
In 2013, 3G teamed up with Mr. Buffett in 2013 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.
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
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.
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.
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com, Dana
Cimilluca at dana.cimilluca@wsj.com, Dana Mattioli at
dana.mattioli@wsj.com and Annie Gasparro at
annie.gasparro@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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