Heinz has been owned by 3G Capital and Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A), which paid $28 billion for the company in 2013.
Once the deal is completed, existing Kraft shareholders will own 49% of the new firm, to be called The Kraft Heinz Company, and current Heinz shareholders will own 51%. Kraft shareholders will receive a special dividend of $16.50 in cash plus one share of the new company for each share of Kraft stock they own. According to the press release, the aggregate amount of the special dividend is approximately $10 billion and is being funded by 3G Capital and Berkshire Hathaway.
The combined company will be the world’s fifth largest food company and have ownership of a laundry list of some of the world’s best-known brands, including Jell-O, Maxwell House, Planters and Kraft, as well as Heinz’s ketchup, soups and other products.
Prepared foods companies like Heinz and Kraft have not been able to adapt quickly to changes in consumer tastes. As in the restaurant business, where fast-food companies like McDonald’s Corp. (NYSE: MCD) and KFC owner Yum! Brands Inc. (NYSE: YUM) are struggling to compete with fresher, higher-quality food from stores like Chipotle Mexican Grill Inc. (NYSE: CMG), Kraft and Heinz need more than scale to compete. Scale might help, but it is not likely to be a total solution.
Nor is Buffett’s role. Along with 3G Capital, he now owns a controlling stake in two of the largest U.S. food companies, after shelling out a significant portion a total $38 billion. While not quite on the scale of his $34 billion purchase of the Burlington Northern Santa Fe railroad in 2009, Buffett is making a sizable bet that the combined companies can compete in a new marketplace.
Since hiving off Mondelez International Inc. (NASDAQ: MDLZ) in September of 2012, Kraft’s stock has appreciated about 34%, compared with a 43% increase in the S&P 500 index.
The two companies expect the transaction to close in the second half of this year and to result in an estimated $1.5 billion in annual cost savings by the end of 2017. According to the announcement, “Synergies will come from the increased scale of the new organization, the sharing of best practices and cost reductions.”
The announcement also noted that the new company plans to maintain Kraft’s current annual per share dividend of $2.20, which it expects “to increase over time.” Kraft does not plan to increase its dividend before the transaction closes.
Kraft shares opened up about 32% in Wednesday’s trading session, near $81.00, well above the 52-week range of $53.33 to $67.74.