3G Gets Krafty- Puts Heinz Ketchup On Oscar Mayer Weiners, With Assist From Warren Buffett

Less than 3 years after being spun off from then Kraft Foods (now the ill-named Mondelez [MDLZ]), Kraft Foods Group (KRFT) has agreed to a merger with Heinz. Heinz was taken private in 2013 by Brazilian private equity firm 3G capital, with backing from Warren Buffett’s Berkshire Hathaway(BRKA,BRKB).  Berkshire Hathaway and 3G will be injecting an additional $10 billion in equity in the company to fund a $16.50 special dividend to Kraft shareholders. It is unclear what the relative shares of Berkshire and 3G are in that number.  In the original Heinz transaction, each had purchased $4 billion in common equity, and Berkshire had purchased an additional $8 billion in high-yield preferred. Berkshire had previously been a large shareholder in Kraft, but had sold most of its stake in 2013.

Kraft has been in turmoil amidst poor performance. In December, Tony Vernon was replaced as CEO by Chairman John Cahill. Other senior managers have departed as well. 3G has proven to be an excellent operator, not just with Heinz, but with Burger King and Anheuser-Busch(BUD) as well.

In additional to the special dividend, Kraft shareholders will continue to hold 49% of the combined company. Kraft Heinz will continue Kraft’s current dividend as well.  The transaction, which was apparently worked out in just 4 weeks, is expected to close in the second half of this year. The company sees annual cost savings of $1.7 billion per year by 2017, as 3G implements its strategies at will be the world’s fifth largest food company with $28 billion in annual revenues.  Kraft shareholders should be happy with the agreement, which has sent shares soaring, up 36% in premarket trading to over $83 per share. For holders since the spin, this represents an excellent return for a stock that then traded below $50.

Disclosure: The author holds shares of Berkshire Hathaway.