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 Group
“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 Company
“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.
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. 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. 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. 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. The remaining shares were held by the shareholders of Kraft Foods. Jointly, KHC had approximate revenue of $29.1 billion for the year 2014..........
Background of Kraft Foods Group & H.J. Heinz
James L. Kraft (Kraft) started Kraft Foods at Chicago in 1903. Kraft, along with his four brothers, formed J.L. Kraft & Brother’s Company in 1909. They expanded their business to New York in 1912, which further led to their international expansion. The company continued to grow as a giant in packaged food industry. In October 2012, Kraft Foods Group was formed after the split of Kraft Foods into two publicly traded companies namely, international snack Food Company ‘Mondelez International’ (MDLZ) (Mondelez) and North American grocery company ‘Kraft Foods Group’............
Challenges Faced by Kraft Foods Group Inc.
It was a cheerful time for the investors of Kraft Foods as the announcement of its merger with H. J. Heinz Co. was made and the reason was the sluggish growth and organizational challenges it faced for many years. Following were the biggest problems faced by Kraft Foods in recent years:
1. Increasing cost of ingredients: Rising commodity prices affected the profit of the company and it was the most significant pressure in 2014. To counter this effect, company raised prices of 50% of its products which further affected the sales.
2. Shift in tastes: Of late, U.S. consumers started opting for healthy food products which included mainly natural and organic ingredients. This made the company struggle with sales and also necessitated to change the business to accommodate the recent growing trend of healthy foods.
3. .................
Expected Synergies: Economies of Scale and International Growth
In 2014, Heinz’ global footprint helped it in generating 61% of total sales from the global markets. On the contrary, Kraft Foods generated around 98% of its total sales only from North America. Therefore, the merger resulted in placing the products of Kraft Foods in the international market through the distribution channels of Heinz, boosting the revenues of KHC. However, the opportunity set would be limited to Kraft Foods’ agreement with Mondelez............
Assignment Questions
I. What are the benefits for Kraft Foods from this merger?
II. What are the benefits for Heinz from this merger?
III. ..............
Exhibits
Exhibit I: Stock Price of Kraft Foods Group Inc.
Exhibit II: Market Index (NASDAQ)
Exhibit III: Stock Price of Kraft Heinz Company