3g Capital and Berkshire Hathaway Inc.

3G Capital and Berkshire Hathaway Inc. will invest $10 billion to merge H.J. Heinz and Kraft Foods Group Inc., combining two powerhouse companies into one of the largest forces in the U.S. food and beverage sector. Kraft shares rose 36 percent to $83.17 upon announcement of the deal for a valuation of approximately $49 billion.  Once the deal is finalized, Kraft shareholders will receive a cash dividend of $16.50 per share plus 49 percent of stock in the combined company.  However, it is difficult to estimate the real value of the transaction, as Heinz is privately held and the new entity, Kraft Heinz Co., will be publicly held.

The merger follows several months of leadership, strategy, and brand challenges at Kraft.  First, Kraft’s top executive exited last December, followed by the heads of finance and marketing in February.  Second, rising commodity prices and a preference by younger consumers for organic ingredients negatively impacted Kraft’s staple packaged products.  Then, in March, the company recalled 6.5 million boxes of Macaroni and Cheese after consumers found metal fragments in the packaging. While the merger could mark a turn-around for Kraft, the company will face a $1.2 billion termination fee if shareholders fail to approve the deal.

Ultimately, the Heinz-Kraft merger is expected to reduce costs and stimulate growth, which could mean even more mergers in the food industry.  For example, the newly combined company plans to cut $1.5 billion in costs by the close of 2017, likely through job reductions.   Also, Kraft brands, currently restricted to the U.S. markets, are expected to expand outside the U.S. as part of the merged entity.  Based on past success at Heinz, and Buffett’s expressed desire to continue partnering with 3G, experts speculate that the duo could go after other food giants such as Kellogg Co. or Campbell Soup Co.