“This transaction is all about growth. This combination aims to expand Kraft’s iconic brands internationally” through Heinz’s already established international distribution channels and infrastructure outside of the U.S. from which 67% of Heinz’s sales currently come, said Alex Behring, chairman of Heinz and the managing partner at 3G Capital, which helped fund the merger.
This will represent a change of direction for Kraft, which has focused on North America following the spin-off of its international snack food business brands into Mondelez in 2012.
At the same time, Kraft’s robust presence in 98% of homes in North America “provides strong growth opportunities for Heinz brands,” Behring added during a press call.
“Looking ahead we are thrilled about the growth potential for Kraft and Heinz together to achieve success and expansion both in North America and internationally,” added Bernardo Hees, CEO of Heinz and appointed CEO of the combined company.
In addition to the broad distribution reach the deal provides, “this transaction enables us to move and grow faster than we could on our own and allows us to fulfill our potential as an industry leader in a fast-changing market place and emerge as a global powerhouse,” added John Cahill, Kraft chairman and CEO.
Indeed, the merger will create the third largest food and beverage company in North America and the fifth largest food and beverage company in the world with eight $1 billion brands, five brands between $500 million and $1 billion and combined revenues of approximately $28 billion, according to the announcement.
Ownership of the newly formed The Kraft Heinz Company will be spilt so that Heinz’s shareholders – private equity firm 3G Capital and Berkshire Hathaway – will have a slight majority stake worth 51% following an investment by them of $10 billion. Kraft shareholders will have a 49% stake in the new company, and will receive a special cash dividend of $16.50 per share, which is about a 27% premium over Kraft’s market value at closing March 24.
Although Heinz is privately held, the new company will be publically traded “out of the gate,” an executive said.
Innovation potential
The merger also will allow the combined company “to make bigger and bolder bets on innovation, based on real fact-based consumer insights,” Cahill said.
He explained that the combined company will build on its current record of launching new products that are in line with consumers’ evolving desires, such as Kraft’s recent launch of Oscar Myer P3 portable protein packs, which taps into consumers’ desire for protein and their need for on-the-go options.
“In addition, we believe our combination will strengthen our partnership with our customers, especially in the center of the store, which represents about 75% of total grocery sales and even more total profit,” Cahill said.
The center store has been struggling recently as more consumers shop the perimeter of the store to find products they perceive as fresher and healthier. But, the merged firm will have several blockbuster brands that continue to draw consumers into the center aisles, including Maxwell House, Planters and Classico. It also brings together Philadelphia, Smart Ones, Velveeta, Lunchables and Jell-O.
Cost savings
The deal also offers the combined company substantial cost savings estimated at $1.5 billion annually by the end of 2017, according to the announcement, which notes the savings will come from the increased scale of the new organization, the sharing of best practices and cost reductions.
The leadership did not comment on potential layoffs due to the merger, but emphasized it is committed to both sides’ hometowns and, therefore, will be co-headquartered in Pittsburgh and the Chicago area.
“Understanding the need to preserve both Heinz and Kraft’s heritage in their respective hometowns of Pittsburgh and the Chicago area, the new company is committed to supporting local charities and community relationships in the communities in which they operate,” according to the announcement.
The decision to split the headquarters will not be a drain on administrative costs or potential synergies Hees added. He noted that the brands are so large and the companies’ roots so deep that it makes more sense to have co-headquarters, which he will commute between.
Other management changes and closing
The transaction is subject to approval by Kraft shareholders, regulators and other customary closing conditions, but is expected to be finalized in the second half of 2015, at which point the management will shift, according to the announcement.
In addition to Hees becoming the CEO of The Kraft Heinz Company, Behring will become chairman of the company and Cahill will become vice chairman and chair of a newly formed operations and strategy committee of the board of directors, the firms said.