In a mega merger announcement, H.J. Heinz and Kraft Foods Group (NYSE:KRFT) stated that they have agreed to form the fifth largest food and beverage company in the world, aptly named The Kraft Heinz Company.
The deal will be led by Warren Buffett’s Berkshire Hathaway and Jorge Lemann’s 3G Capital, which collectively own H.J. Heinz. To facilitate the merger, they will fund a cash dividend of $16.50 per share, which equates to about $10 billion in an equity contribution. Buffett told CNBC that current Heinz shareholders would own 51% in the combined company with Kraft shareholders, who still must vote to approve the deal, owning a 49% stake. Shares of Kraft rose more than 30% in response to the news.
“This is my kind of transaction, uniting two world-class organizations and delivering shareholder value,” said Buffett in a statement. “I’m excited by the opportunities for what this new combined organization will achieve.”
Back in 2013, Berkshire Hathaway and 3G bought Heinz for $23 billion and took the company private. Buffett noted that he would ultimately own $9.5 billion of the new stock – $4.25 billion of common stock from Berkshire’s initial stake in Heinz and an additional $5.2 billion that he will put into the company. According to Buffett, even though there are currently around 600 million shares outstanding of Kraft, after the deal, he estimates the number will rise to about 1.2 billion shares. The combined firm, the Kraft Heinz Company, will trade publicly and include subsidiary brands such as the Kraft-owned, Oscar Mayer.
In keeping with Buffett’s long-term investing strategy, he noted that Berkshire is more concerned with where the Kraft Heinz Company will be 50 years from now rather than the effects of immediate cost savings from the merger. Analysts expect the company to save $1.5 billion per year by the end of 2017.
“The short term doesn’t make much difference to us, because we will be in this stock forever,” said Buffett. “This is a business with us. It’s not really a stock. It’s a company that we’ll own 26 and a fraction percent of.”
The Kraft Heinz Company expects a revenue stream of $28 billion and will be co-headquartered in Pittsburgh and in the Chicago area. Buffett stated that the new board of the company would include five directors from Kraft and six directors from Heinz. When the deal closes, Alex Behring, the chairman of Heinz and managing partner of 3G Capital, will become chairman of the new company. John Cahill, the current chairman and chief executive of Kraft, will be named vice chairman.
Also consistent with the Oracle of Omaha’s investment philosophy, the deal, which took only about four weeks to structure, is an add-on acquisition to an existing investment.
“Before looking at new investments, we consider adding to old ones,” Buffett said. “If a business is attractive enough to buy once, it may well pay to repeat the process.”