Major private equity player in the global food sector, 3G Capital Partners LP, recently raised $5 billion for dealmaking and has been seeking targets for acquisition. The group has a long history of major food industry acquisitions including its major stake in InBev, its 2008 acquisition of Anheuser-Busch, its 2010 $3 billion acquisition of Burger King, its 2013 acquisition of HJ Heinz Co. in association with Warren Buffet’s Berkshire Hathaway for $23 billion, and its 2014 $11 acquisition of a 51% stake in Tim Horton’s which it completed through its Burger King holding and with financing from Warren Buffet.
Now, 3G Capital Partners has acquired Kraft Foods Group in a deal orchestrated through its HJ Heinz unit in association with Warren Buffet’s Berkshire Hathaway that would value Kraft Foods at $46 billion.
Both Berkshire and 3G will invest $10 billion in the deal that will create the newly formed combined business to be called Kraft Heinz Co. The new company will have dual headquarters in Pittsburgh and Chicago, and will maintain Kraft’s placement as a publicly traded company. Kraft shareholders will receive 49% of the stock in the new entity and will receive a cash dividend of $16.50 per share.
3G has expressed that it wants to expand, and acquiring Kraft Foods would give Heinz a path to growth that recent cost cutting cannot provide. Growth will be a challenge, however. Kraft, like many packaged food companies, has had difficulty addressing rapidly changing consumer tastes and trends, leaving it with low sales and overcapacity.
In addition, Kraft is heavily focused on the U.S. market and its major brands, including its iconic cheese products, Oscar Mayer deli meats, Cool Whip dessert toppings, and Maxwell House coffee, have been hit by consumers opting for fresher, healthier choices on the market. This has resulted in Kraft losing market share in 40% of its businesses, and shares remaining flat in the rest. For 2014, the group’s revenue remained flat at $18 billion, but its profits fell by 62% to $1 billion on higher commodity costs and significant changes to its post-employment benefits plans.
Kraft has attempted to turn sales around and lift its appeal with consumers through the removal of artificial colors from its macaroni and cheese products, the launch of its ‘P3’ high protein snack packs sold through Oscar Mayer, and its deal to place the ‘Kids Eat Right’ logo from the Academy of Nutrition and Dietetics on its American cheese slices, however these actions have not produced the desired results.
3G differs from the majority of other private equity groups in that its founders prefer to invest on longer terms – longer than the average five to seven years – and its approach to fundraising differs in that it tends to turn to some of the world’s wealthiest investors including Pershing Square Capital Management LP and Warren Buffet to help finance deals. The group also employs what it terms its ‘zero cost budgeting’ system through which each division of a company must justify its costs from scratch every year. Through such measures, the two companies target cost savings of $1.5 billion by the end of 2017.