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Heinz will buy Kraft Foods in mega-merger for American food
Anchin Partner Quoted:
Gregory A. Wank, CPA
Partner
greg.wank@anchin.com
212.840.3456
This article was originally published by The Washington Post on March 25, 2015:
http://www.washingtonpost.com/news/business/wp/2015/03/25/heinz-will-buy-kraft-foods-in-mega-merger-for-american-food/
Taking aim soon at America’s growing love of fresh food: A billion-dollar mega-marriage of sugary ketchup and processed
cheese.
H.J. Heinz and Kraft Foods Group said Wednesday that they would merge to form one of the world’s biggest food
empires, combining two of the most iconic names in the American kitchen and potentially signaling a big changes for
how the country eats.
The Kraft Heinz Co., headquartered in both Pittsburgh and the Chicago area, will become North America’s third-largest
food and drink empire, owning eight household-name chow brands with annual sales of $1 billion or more.
Heinz and Kraft’s classic staples are hallmarks of the American family meal. Heinz makes ketchup, Bagel Bites and
Classico pasta sauce. Kraft’s brands include Capri Sun, Cheez Whiz, Cool Whip, Jell-O, Kool Aid, Lunchables, Oscar
Mayer and Velveeta, as well as its namesake dressing, mayo and macaroni and cheese. The company says its products
can be found in a staggering 98 percent of North American households.
But sales of Kraft’s once-beloved, heavily processed grub have crumbled in recent years, as the country shows a
changing taste for seemingly fresher, more natural cuisine. Kraft’s earnings plunged more than 60 percent last year,
even as the food giant began to replace executives and clean house.
Increasingly health-conscious American shoppers, particularly younger eaters, have boosted sales for foods offering
organic or local ingredients, but Kraft has grown only more dependent on its processed staples: The largest part of its
revenue last year, at more than $4 billion, was cheese.
Product embarrassments – including a recall this month of more than 6 million boxes of Kraft Macaroni & Cheese,
some of which were found to have metal shards – have only solidified that repute.
The takeover was engineered by legendary investor Warren Buffett’s Berkshire Hathaway and 3G Capital Partners, a
famed Brazilian buyout giant, both of which partnered in 2013 to buy ketchup giant Heinz for $23 billion.
“This is my kind of transaction,” Buffett said in a statement. “Uniting two world-class organizations and delivering
shareholder value. I’m excited by the opportunities for what this new combined organization will achieve.”
It’s unclear how Kraft’s offerings could change under the new label. The Brazilian firm has a reputation for gobbling up
sagging consumer favorites, aggressively slashing costs and reshaping brands in hopes of garnering better business.
Reworking the century-old Kraft’s ultra-processed, packaged fare into something modern Americans will want to eat,
analysts said, might be one of their first big moves.
“Unless the combined company focuses on [product innovation],” said Neil Saunders, managing director of retail
consulting firm Conlumino, “it will ultimately end up being larger but no more successful than the standalone companies
are today.”
Other Big Food empires have waged big gambles in hopes of capturing the growing trend toward healthier cuisine.
General Mills announced in September it would buy Annie’s, one of the nation’s biggest producers of natural and
organic food, in a deal worth $820 million. Hershey, the chocolate titan, expanded into natural snacks in January by
buying Krave Foods, a maker of “healthy gourmet jerky.”
Though the push for foods with a cleaner, greener image was long derided as a fad, analysts said the soaring sales of
healthy-food companies forced food conglomerates to finally take notice. Organic food sales jumped 11 percent last
year, to $35 billion, Organic Trade Association data show. Sales of high-protein health-and-wellness bars, Krave’s main
market, are growing at more than twice the speed of the overall food industry.
“Today’s healthier consumer is not just the fringe that are dieticians and nutritionists,” said Greg Wank, chairman
of the food and beverage services group at Anchin, Block & Anchin, a corporate advisory firm. “Everyone on the
street is more aware what’s in their food, and when they start to look at the labels in their processed food, they’re
finding stuff they don’t want to put in their body.”
But some market watchers criticized Kraft for doing too little to adapt to a healthier food marketplace. Earlier this
month, when a national trade group of dietitians awarded a nutrition seal to Kraft Singles, the American cheese
slices technically labeled “Pasteurized Prepared Cheese Product,” health advocates criticized the move as a shocking
message for American kids.
The deep-pocketed buyout kings, 3G and Berkshire, have also not unveiled their plans for the Kraft-Heinz powerhouse,
which will show combined yearly revenues of about $28 billion. But the companies said annual cost savings from
merging the two brands could reach $1.5 billion by the end of 2017.
When Berkshire and private-equity firm 3G bought Heinz, the firm saw plants closed, jobs cut and budgets squeezed
under a fierce cost-cutting plan. (A favorite phrase of Carlos Alberto Sicupira, one of Brazilian billionaires who heads
3G: “Costs are like fingernails: You have to cut them constantly.”)
Both companies’ boards unanimously approved the merger, but the deal will still need approval from Kraft’s
shareholders and federal regulators. The deal is scheduled to close later this year.
It’s unclear just how antitrust regulators will size up the new global mega-firm. “Just getting bigger is not a violation of
antitrust,” said Ben Gomes-Casseres, a professor at the Brandeis International Business School in Boston. “These two
are not in the same market, besides being processed foods. … I don’t expect the price of ketchup to go up.”
But some market watchers said the mega-merger signaled a worrying new boost for Big Food, further consolidating
power in fewer monolithic brands and shrinking the variety of prices and products on supermarket shelves.
“All these food-space mergers give (buyers) the illusion of choice. They’re thinking, ‘Oh gosh, look at all these brands,’”
said Diana Moss, president of the American Antitrust Institute. “But what the consumer doesn’t see is the smaller and
smaller number of manufacturers maintaining those brands. It doesn’t mean they compete with each other — they
don’t — and that gives them significant power to raise prices and reduce choice.”
Kraft shares soared more than 40 percent in morning trading. Heinz shareholders will own 51 percent of the new
company, and Kraft shareholders will take the rest, plus a $16.50 dividend per share funded by Berkshire and 3G.
It is only the latest big-business shakeup for Kraft, which split from its global snacking business in 2012. That company,
now called Mondelez International, owns Cadbury, Chips Ahoy, Oreo, Ritz and Wheat Thins. In December, Kraft named
former PepsiCo head John Cahill its new chief executive, saying he would examine the flagging business anew. Two
months later, after the company reported a $400 million quarterly loss, Kraft’s chief financial officer and two other top
leaders stepped down.
Heinz chief executive and 3G partner Bernardo Hees will lead the new company. Alex Behring, another 3G partner, will
become chairman, and Kraft chief executive John Cahill will become vice chairman.
The takeover could pave the way for even further expansion by 3G into America’s pantries, and executives there have
reportedly eyed brands like Campbell Soup and PepsiCo as ripe for takeover. “These guys have global ambitions,”
Buffett told the Wall Street Journal in January.
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