Burgess COMMENTARY

Peter Burgess

Kraft and Heinz to Merge in Deal Backed by Buffett and 3G Capital

Kraft has been wrestling with low margins and flat sales amid the shifting tastes of consumers. Credit Gene J. Puskar/Associated Press

First it was Budweiser beer. Then came Burger King Whoppers. Next up was Heinz ketchup.

Now 3G Capital, a Brazilian private investment group that already owns a suite of America’s most prominent food and beverage brands, has struck a deal to take control of Kraft Foods, the maker of macaroni and cheese, Oscar Mayer meats, Planters nuts and Jell-O.

Working with the billionaire investor Warren E. Buffett’s Berkshire Hathaway, 3G said on Wednesday that it would merge Kraft with Heinz, the condiment and canned foods giant it acquired with Mr. Buffett in 2013.

Once combined, the Kraft Heinz Company will be one of the largest food and beverage conglomerates in the world, with nearly $28 billion in annual sales, and is expected to have a market value of more than $80 billion.

Following the merger of Kraft Foods and H. J. Heinz, the billionaire Warren E. Buffett said that the Brazilian investment firm 3G Capital would hold on to their investment. Video by CNBC on Publish Date March 25, 2015. Photo by CNBC.

“This is a doubling-down on processed, packaged, sugary foods at a time when people are moving away from them,” said Marlene Morris Towns, a professor of marketing at Georgetown University. “We’re becoming much more conscious about what we eat.”

But by uniting Kraft with Heinz, 3G intends to follow a familiar playbook: Take ownership of iconic brands, aggressively cut costs and expand internationally. The model has succeeded at Anheuser-Busch InBev, the world’s largest brewer, which 3G created by taking over Anheuser-Busch in 2008.

The group then acquired Burger King in 2010 and last year merged it with the Canadian doughnut chain Tim Hortons to form a new company, Restaurant Brands International. And in 2013, 3G and Mr. Buffett teamed up to buy Heinz, taking the ketchup maker private. Since then, its sales have grown steadily.

Now, by combining Kraft and Heinz, 3G and Mr. Buffett are betting that this recipe will work with some of the biggest names in packaged and processed foods, including Kool-Aid, Velveeta and Lunchables.

“Combining our two businesses, we’ll create the third-largest food and beverage company in North America and the fifth-largest food and beverage company in the world,” Alex Behring, the managing partner of 3G, who will be chairman of Kraft Heinz, said on a call with investors. “The company will enjoy significantly enhanced scale in its key North American market, not only at retail but also in the food service channel.”

In particular, the new owners intend to use Heinz, which generates most of its sales abroad, to expand the global appetite for Kraft, which sells almost all of its products in the United States.

“Heinz currently benefits from a truly global platform, which we will leverage to expand the reach of Kraft’s brands to consumers across the globe,” Mr. Behring said.

Brazilian Investor 3G Capital’s Big Food Deals

With deals involving Burger King, Kraft and the company behind Budweiser, 3G Capital and one of its backers, Jorge Paulo Lemann, have become powerhouses in the world of food brands.

Despite the deal’s size, former regulators did not expect significant antitrust hurdles.

“These product lines seem to be more complementary, but where they find any overlaps they could look for a divestiture of the overlap lines,” said Richard Dagen, a partner at Axinn Veltrop & Harkrider and a former official at the Federal Trade Commission. “Heinz mustard on Oscar Mayer hot dogs would be a nice complementary product line.”

Plans to merge Kraft and Heinz have been in the works for years. When 3G and Mr. Buffett took over Heinz, they identified Kraft as an ideal merger partner. Early this year, soon after John T. Cahill took over as chief executive, 3G and Mr. Buffett approached Kraft about a deal.

And as he was with Heinz, Mr. Buffett was instrumental in bringing the deal together. His company, Berkshire Hathaway, is investing beside 3G again and will help pay a special dividend to Kraft shareholders.

“I am delighted to play a part in bringing these two winning companies and their iconic brands together,” Mr. Buffett said in a statement. “I’m excited by the opportunities for what this new combined organization will achieve.”

The merger is a return to mega-deals for Mr. Buffett, who has maintained that he is hunting for “elephants,” large companies he can incorporate into the growing Berkshire conglomerate. Just last month, in his annual letter to shareholders, Mr. Buffett hinted that he would like to do a deal like this with 3G.

As a combined company, Kraft Heinz will have revenue of about $28 billion, with eight individual brands each reporting sales of at least $1 billion a year, and five brands with $500 million to $1 billion in sales.

A Bigger Portion

If H.J. Heinz acquires Kraft Foods, it would create the third-largest food company by sales in North America.

Source: company filings and Nielsen, via investor presentation

North American food and beverage sales, most recent fiscal year PepsiCo $37.2 billion Nestlé $27.9 Kraft-Heinz — proposed merger $22.2 Coca-Cola $21.5 Kraft Foods $17.9 General Mills $13.7 Kellogg $9.5 Mondelez $6.9 Campbell Soup $6.4 Dr Pepper Snapple $5.6 J.M. Smucker $5.5 H.J. Heinz $4.2 McCormick $2.4 Source: company filings and Nielsen, via investor presentation By The New York Times

Heinz will control 51 percent of the combined company, while Kraft shareholders, who have yet to vote on the deal, will own 49 percent.

Kraft shareholders will receive a special cash dividend of $16.50 a share, or about $10 billion, to be paid for by 3G Capital and Berkshire. The dividend represents a 27 percent premium based on Kraft’s market value of about $36 billion on Tuesday. Shares of Kraft surged more than 35.6 percent on Wednesday, to $83.17.

In addition to the dividend, Kraft will hold a nearly 50 percent stake in a company expected to have a market value of more than $80 billion. Because Heinz is private, its equity value is not publicly known, but people briefed on the matter said the combined company was expected to be worth as much as $100 billion by 2017.

The stake owned by 3G and Berkshire will remain privately held while the rest of the company’s stock will be publicly traded on the Nasdaq. In time, some of the stock controlled by 3G and Berkshire could be sold to public shareholders, but the companies expect to retain effective control even if their equity ownership dips below 50 percent.

From its base in Brazil, 3G has become a powerhouse in the world of food brands. With the firm, which counts the billionaire financier Jorge Paulo Lemann among its owners, Kraft will get management known for its cost-cutting skills and strategic acumen. Mr. Behring, the managing partner of 3G, will be chairman of Kraft Heinz, while Bernardo Hees, the chief executive of Heinz, will be the chief executive of the combined company.

The companies estimated they could find savings of $1.7 billion annually by the end of 2017 through cost reductions and efficiencies of scale. Much of that could come from cutting jobs, something 3G is known to do after acquiring companies.

The combined company intends to pay a dividend, as Kraft does today, and increase it over time. Kraft Heinz will have co-headquarters in the Chicago and Pittsburgh areas.

Photo A former Heinz factory is now loft apartments in Pittsburgh. Credit Jason Cohn/Reuters

And while the deal represents a big bet on processed foods that are losing ground to more healthful options, analysts say products from Kraft and Heinz will be strong sellers for years. Moreover, they suggested that Kraft Heinz could introduce more healthful versions of some of the strong brands in its portfolio.

“Consumption patterns move like plate tectonics, and this move to fresh has been happening over decades,” said Darren Seifer, a food and beverage industry analyst at NPD Group. “We do expect it to have legs. But it’s going to take a while.”

Jeffrey Cane and Michael J. de la Merced contributed reporting.

A version of this article appears in print on March 26, 2015, on page B1 of the New York edition with the headline: A Mega-Bet on Processed Food. Order Reprints| Today's Paper|Subscribe RELATED COVERAGE

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The mega-deal — by far the largest merger of the year — is a big bet on conventional staples of the American cupboard, even as consumers are shifting away from processed foods. Millennials and affluent consumers are seeking more local, fresh and organic products. Lower-income consumers are spending less on name brands.