Details emerge on Heinz Kraft merger, and what it means
New details are emerging about the merger, announced last week, between H.J. Heinz Company and Kraft Foods. The two companies have signed a definitive merger agreement to form a new company, The Kraft Heinz Company.
The merger will create the fifth largest food and beverage company in the world, and the third largest in North America. The new company, which will be co-headquartered in Pittsburgh and the Chicago area, is expected to have revenues of approximately $28 billion with eight $1+ billion brands and five brands between $500 million-$1 billion.
It has been reported that the Australian Competition and Consumer Commission (ACCC) was considering the potential impact of the merger on the grocery sector in Australia. However, the deal is unlikely to create a giant grocery supplier in Australia, after many of Kraft’s brands in Australia were taken on by snack food manufacturer Mondelez International when Kraft Foods split into two companies in 2012.
Under the terms of the agreement with Heinz, which has been unanimously approved by both Heinz and Kraft’s Boards of Directors, Kraft shareholders will own a 49 per cent stake in the combined company, and current Heinz shareholders will own 51 per cent on a fully diluted basis. Kraft shareholders will receive stock in the combined company and a special cash dividend of $16.50 per share. The aggregate special dividend payment of approximately $10 billion is being fully funded by an equity contribution by investment firms Berkshire Hathaway and 3G Capital.
H.J. Heinz Company is one of the world’s leading marketers and producers of foods such as ketchup, sauces, meals, soups, snacks and infant nutrition. The Heinz portfolio of brands also include Ore-Ida potatoes, Weight Watchers Smart Ones entrees, T.G.I Friday’s snacks, and Plasmon infant nutrition. Heinz is perhaps most famous for its Heinz Tomato Ketchup product.
Kraft Foods Group, Inc. is one of North America’s largest consumer packaged food and beverage companies, with annual revenues of more than $18 billion. The company’s iconic brands include Kraft, Capri Sun, Jell-O, Kool-Aid, Lunchables, Maxwell House, Oscar Mayer, Philadelphia, Planters and Velveeta. Kraft employs 22,000 people in the US and Canada.
Global brand portfolio ‘powerhouse’
The combination of these iconic food companies joins together two portfolios of popular brands, including Heinz, Kraft, Oscar Mayer, Ore-Ida and Philadelphia.
Kraft said the ‘complementary nature’ of the two brand portfolios presented “substantial opportunity for synergies, which will result in increased investments in marketing and innovation”.
“Together we will have some of the most respected, recognised and storied brands in the global food industry, and together we will create an even brighter future,” said John Cahill, Kraft Chairman and Chief Executive Officer.
“This combination offers significant cash value to our shareholders and the opportunity to be investors in a company very well positioned for growth, especially outside the United States, as we bring Kraft’s iconic brands to international markets,” Mr Cahill said. “We look forward to uniting with Heinz in what will be an exciting new chapter ahead,” he said.
Heinz Chief Executive Officer Bernardo Hees said the merger would create “unique opportunities” for consumers worldwide.
“Together, Heinz and Kraft will be able to achieve rapid expansion while delivering the quality, brands and products that our consumers love,” Mr Hees said. “Over the past two years, we have transformed Heinz into one of the most efficient and profitable food companies in the world while reinvesting behind our key brands and continuing our relentless commitment to quality and innovation,” he said.
‘Strong platform’ for international growth
Alex Behring, Chairman of Heinz and the Managing Partner at 3G Capital said that by bringing together the two iconic companies, Kraft and Heinz were “creating a strong platform for both US and international growth”.
“Our combined brands and businesses mean increased scale and relevance both in the U.S. and internationally,” Mr Behring said. “We have the utmost respect for the Kraft business and its employees, and greatly look forward to working together as we integrate the two companies,” he said.
Warren Buffett, Chairman and CEO of Berkshire Hathaway said he was “excited by the opportunities” for what the new combined Company would achieve.
Management and governance
When the transaction closes, Alex Behring, Chairman of Heinz and the Managing Partner at 3G Capital, will become the Chairman of The Kraft Heinz Company. John Cahill, Kraft Chairman and Chief Executive Officer, will become Vice Chairman and chair of a newly formed operations and strategy committee of the Board of Directors.
Bernardo Hees, Chief Executive Officer of Heinz, will be appointed Chief Executive Officer of The Kraft Heinz Company. The new executive team for the combined global company will be announced during the transition period, but no later than transaction closing.
The Board of Directors of the combined company will consist of five members appointed by the current Kraft Board, as well as the current Heinz Board, including three members from Berkshire Hathaway and three members from 3G Capital.
Structure and terms
Existing Heinz shareholders will have a 51 per cent ownership stake in the combined company, and existing Kraft shareholders will have a 49 per cent ownership stake on a fully diluted basis. Each share of Kraft will be converted into one share of The Kraft Heinz Company.
The Companies said “significant synergy potential” includes an estimated $1.5 billion in annual cost savings implemented by the end of 2017. They said synergies would come from the increased scale of the new organisation, the sharing of best practices and cost reductions.
The transaction is expected to be EPS accretive by 2017. Once the transaction is complete, The Kraft Heinz Company plans to maintain Kraft’s current dividend per share, which is expected to increase over time. Kraft has no plans to change its dividend prior to closing.
The special cash dividend of $10 billion in the aggregate to existing Kraft shareholders will be paid upon closing and will be funded by an equity investment by Berkshire Hathaway and 3G Capital. Shares of the company will continue to be publicly traded.
As the cash consideration is fully funded by common equity from Berkshire Hathaway and 3G Capital, the merger is not expected to increase the debt levels of The Kraft Heinz Company. The Company is fully committed to deleveraging in a timely manner and to maintaining an investment grade rating going forward.
The transaction is subject to approval by Kraft shareholders, receipt of regulatory approvals and other customary closing conditions and is expected to close in the second half of 2015.
Lazard served as exclusive financial advisor for Heinz, and Cravath, Swaine & Moore and Kirkland and Ellis acted as legal advisors.
Centerview Partners LLC served as exclusive financial advisor for Kraft, and Sullivan & Cromwell acted as legal advisor.