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Kraft Merges with Heinz: A Case Study*

CASE STUDY, FINANCIAL MANAGEMENT
ET Cases - GSMC, 14 Pages
AUTHOR(S) : Rajneesh Ranjan Jha - Research Scholar, IBS Hyderabad, Chetna Priyadarshini - Research Scholar, IBS Hyderabad

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Kraft Merges with Heinz: A Case Study

 

“Together we will have some of the most respected, recognized and storied brands in the global food industry, and together we will create an even brighter future. This combination offers significant cash value to our shareholders and the opportunity to be investors in a company very well positioned for growth, especially outside the United States, as we bring Kraft’s iconic brands to international markets. We look forward to uniting with Heinz in what will be an exciting new chapter ahead.”

– J. Cahill, Chairman & CEO, Kraft Foods Group1


“We are thrilled about the unique opportunities this merger will create for our consumers worldwide, as well as our employees and business partners. Together, Heinz and Kraft will be able to achieve rapid expansion while delivering the quality, brands and products that our consumers love. Over the past two years, we have transformed Heinz into one of the most efficient and profitable food companies in the world while reinvesting behind our key brands and continuing our relentless commitment to quality and innovation.”

– B. Hees, CEO, H.J. Heinz Company2


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

– W. E. Buffett, Chairman & CEO, Berkshire Hathaway Inc.3, 4


The Kraft Heinz Company (KHC) was acclaimed as the third-largest Food & Beverage Company in North America and fifth-largest in the world after the successful merger that took place between publicly traded Kraft Foods Group (Kraft Foods) and H.J. Heinz Company (Heinz) that was privately held.5 This merger was announced on March 25th 2015 and successfully executed on July 2nd 2015, resulting in trading of newly formed KHC’s shares on NASDAQ from July 6th 2015.6 KHC became a part of the S&P 500 Index. The investment firms, 3G Capital and Berkshire Hathaway, backed the $62.6 billion deal which was one of the giant mergers in the US in 2015.7 Warren Edward Buffett’s (Buffet) Berkshire Hathaway owned around 325 million shares in KHC after it invested around $9.5 billion. Berkshire Hathaway along with 3G Capital paid a cash dividend of $16.5 per share as a one-time payment reflecting equal value of Kraft Foods’ and KHC’s shares. The shareholders of Heinz, that included Berkshire Hathaway and 3G Capital, held around 51% stake in KHC.8 The remaining shares were held by the shareholders of Kraft Foods. Jointly, KHC had approximate revenue of $29.1 billion for the year 2014.9

 Exhibits

Exhibit I: Stock Price of Kraft Foods Group Inc.

Exhibit II: Market Index (NASDAQ)

Exhibit III: Stock Price of Kraft Heinz Company


  • 1 “H.J. Heinz Company and Kraft Foods Group Sign Definitive Merger Agreement to Form The Kraft Heinz Company”, www.news.heinz.com, March 25th 2015 (accessed date: October 8th 2015)
  • 2 “H.J. Heinz Company and Kraft Foods Group Sign Definitive Merger Agreement to Form The Kraft Heinz Company”, op.cit.
  • 3 David Gelles, “Kraft and Heinz to Merge in Deal Backed by Buffett and 3G Capital”, www.nytimes.com, March 25th 2015 (accessed date: October 9th 2015)
  • 4 Mr. Buffett formed Buffett Partnership Ltd. in 1965 and by 1965 Berkshire Hathaway was controlled by him. He is one of the world’s richest men and a celebrated philanthropist, www.berkshirehathaway.com (accessed date: October 8th 2015)
  • 5 “The Kraft Heinz Company Announces Successful Completion of the Merger between Kraft Foods Group and H.J. Heinz Holding Corporation”, www.news.heinz.com, July 2nd 2015 (accessed date: October 13th 2015)
  • 6 Ibid.
  • 7 Luke Graham, “The 5 biggest M&A deals of the year”, www.cnbc.com, September 10th 2015 (accessed date: October 14th 2015)
  • 8 “What Every Investor Needs to Know about Kraft Heinz: A Series Overview”, www.marketrealist.com, (accessed date: January 6th 2016)
  • 9 Ibid.

Teaching Note Preview

Kraft Merges with Heinz: A Case Study

 

Synopsis

The Kraft Heinz Company (KHC) was acclaimed as the third-largest Food & Beverage Company in North America and fifth-largest in the world after the successful merger that took place between Kraft Foods Group (Kraft Foods) and H.J. Heinz Company (Heinz).1 This merger was announced on March 25th 2015 and successfully executed on July 2nd 2015, resulting in trading of newly formed KHC’s shares on NASDAQ from July 6th 2015.2 KHC became a part of the S&P 500 Index. The investment firms, 3G Capital and Berkshire Hathaway, backed this $62.6 billion deal which was one of the giant mergers in the US in 2015.3 Warren Buffett’s Berkshire Hathaway owned around 325 million shares in KHC after it invested around $9.5 billion. Berkshire Hathaway along with 3G Capital paid a cash dividend of $16.5 per share as a one-time payment reflecting equal value of Kraft Foods’ and KHC’s shares. The shareholders of Heinz held around 51% stake in KHC. The remaining shares were held by the shareholders of Kraft Foods. Jointly, KHC had an approximate revenue of $29.1 billion for 2014. The commitment of KHC towards its roots was reflected through the retention of its headquarters at Chicago and Pittsburgh. The expected synergy from the deal was expansion of Kraft’s products globally through Heinz’s global outreach and cost cutting through effective operations. The challenges which made Kraft Foods an attractive target to be acquired by Heinz include increasing ingredient costs, changing tastes of consumers, lack of growth opportunities, etc. Another concern of this deal was the layoff of thousands of employees as it happened at Heinz by 3G Capital, which is known for cost cutting by reducing manpower.

Prerequisite Conceptual Understanding before the Classroom Discussion

Conceptual understanding of mergers and acquisitions is required. Students/participants should also read the following to enable better classroom discussion:

  • • DePamphilis, D. (2009). Mergers, acquisitions, and other restructuring activities: An integrated approach to process, tools, cases, and solutions. Academic Press.
  • • Chapman, K., & Edmond, H. (2000). Mergers/acquisitions and restructuring in the EU chemical industry: patterns and implications. Regional Studies, 34(8), 753-767.
  • • Coyle, B. (2000). Mergers and acquisitions. Global Professional Publishing.
  • • Angwin, D. (2007). Mergers and acquisitions. John Wiley & Sons, Ltd.
  • • Jansen, S. A. (1998). Mergers & Acquisitions. GablerVerlag Springer Fachmedien Wiesbaden GmbH, Wiesbaden.

 

Case Positioning and Setting

The case can be used in business management courses, specifically for MBA/PGDM students pursuing finance as their specialization.

Assignment Questions

I. What are the benefits for Kraft Foods from this merger?
II. What are the benefits for Heinz from this merger?
III.....................

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Abstract

This case deals with the basic understanding of mergers by focusing on synergies involved in the merger of Kraft and Heinz. This merger created a new company Kraft Heinz Company (KHC) on July 2nd 2015 with a ticker symbol of KHC on NASDAQ from July 6th 2015. KHC became the third largest Food and Beverage Company in North America and the fifth largest Food and Beverage Company in the world. The merger was announced on March 25th 2015 which involved the merger of a publicly traded company Kraft Foods Group and a privately held firm H.J. Heinz Company. The investment firms, 3G Capital and Berkshire Hathaway, backed this $62.6 billion deal which was one of the giant mergers in the US in 2015. Warren Buffett’s Berkshire Hathaway owned about 325 million shares in Kraft Heinz Company after investing about $9.5 billion. The expected synergy from the deal was expansion of Kraft’s products internationally through Heinz’s global outreach and cost cutting through effective operations. The other benefit of this merger came from Kraft’s much better credit rating than that of Heinz. Heinz expected to refinance its high-yielding debt with low-yielding, investment-grade debt.



Pedagogical Objectives

  • The students will be able to understand the concept of mergers and acquisitions
  • They will be aware about the transaction methods of mergers, and situations in which a company can be an attractive target for mergers
  • As future finance managers, students will also be able to foresee the expected synergies of mergers and evaluate their efficiency

Case Positioning and Setting
The case can be used in business management courses, specifically for MBA/PGDM students pursuing finance as their specialization.


* GSMC 2017, IIM Raipur

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- Case Study
- Teaching Note (**ONLY for Academicians)
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