Heinz and Kraft Foods merger to create third largest food company in North America

Heinz and Kraft Foods merger to create third largest food company in North America

H. J. Heinz and Kraft Foods have agreed to $46 billion deal to merge operations, creating the third-largest food company in North America. Kraft shareholders will hold 49 percent stake in Kraft Heinz Co. After the deal was announced Kraft stock jumped by 36 percent to close at $83.17. Kraft shareholders will also receive nearly 29% of their current holding valuation as cash dividend.

Warren Buffett's Berkshire Hathaway Inc and Brazilian private equity firm 3G Capital played a major role in finalizing the deal. Berkshire Hathaway will hold 320 million shares in the combined entity. Two years back, Berkshire Hathaway and Brazilian private equity firm 3G Capital had joined hands to acquire controlling stake in Heinz. In the last Berkshire Hathaway letter to investors, Buffett had mentioned that his company will be involved with 3G Capital in few more deals.

People close to the deal informed that 3G approached Kraft CEO John Cahill and told him that Kraft was the best match for the deal. However, they also indicated that if Kraft management declines the deal, 3G would consider other options. Alex Behring da Costa, 48, a 3G co-founder and Heinz chairman Alex Behring discussed the deal with Cahill in Northfield.

The merger between Heinz and Kraft would help in cost cutting and improvement in margins. Heinz currently enjoys a strong margin of $20 profit on even $100 in sales. Kraft has much lower margins but the company is one of the best targets for Heinz to improve its product portfolio and consumer reach.

Last month, Kraft chief executive, John Cahill said, “It’s clear that our world has changed and our consumers have changed, but our company has not changed enough and certainly has not kept pace.”

Heinz Chairman Alex Behring and CEO Bernando Hees will retain their roles in Kraft Heinz Co.