Kraft, Heinz Merging To Form Food Giant

(RTTNews) - Kraft Foods Group, Inc. (KRFT) agreed Wednesday to merge with H.J. Heinz Co. to create a food giant to be named The Kraft Heinz Co., which will be the fifth-largest food and beverage company in the world.

The Wall Street Journal had reported late Tuesday that the two companies were in talks on a deal likely to top $40 billion.

The deal was financed by a $10 billion investment from private equity firm 3G Capital and Warren Buffett's Berkshire Hathaway, the combination that had taken Heinz private for about $23 billion in 2013.

"This is my kind of transaction, uniting two world-class organizations and delivering shareholder value," Berkshire Hathaway Chairman and CEO Warren Buffett said in a statement. "I'm excited by the opportunities for what this new combined organization will achieve."

The merged entity, also the third-largest food and beverage company in North America, will generate revenues of about $28 billion with eight $1 billion plus brands and five brands between $500 million and $1 billion.

The deal will see the current Kraft shareholders receiving a special cash dividend of $16.50 per share, represents 27 percent of Kraft's closing price of $61.33 on Tuesday. Following the announcement, Kraft shares are skyrocketing more than 35 percent.

Each share of Kraft will be converted into one share of the combined entity, with Kraft shareholders owning a 49 percent stake in the new company upon closing. Shares of Kraft will continue to be publicly traded. Meanwhile, current Heinz shareholders will own 51 percent stake in the new company.

The deal, which has the unanimous approval by the Boards of Directors of both companies, is expected to close in the second half of 2015.

The deal brings together two portfolios of beloved brands, including Heinz, Kraft, Oscar Mayer, Ore-Ida and Philadelphia. The complementary nature of the two brand portfolios presents substantial opportunity for synergies, including an estimated $1.5 billion in annual cost savings implemented by the end of 2017.

Alex Behring, Chairman of Heinz and the Managing Partner at 3G Capital, said, "By bringing together these two iconic companies through this transaction, we are creating a strong platform for both U.S. and international growth. Our combined brands and businesses mean increased scale and relevance both in the U.S. and internationally."

The deal is also expected to be add to earnings per share by 2017. The new combined entity also plans to maintain Kraft's current dividend per share, which is expected to increase over time.

Upon closure of the deal, Behring will become the chairman of the new company and Cahill will become vice chairman and chair of a newly formed operations and strategy committee of the Board of Directors.

Meanwhile, Heinz CEO Bernardo Hees will lead the combined company as its CEO. The new company will be co-headquartered in Pittsburgh and the Chicago area.

The new company's Board of Directors will consist of five members appointed by the current Kraft Board, as well as the current Heinz Board, including three members from Berkshire Hathaway and three members from 3G Capital.

The current Kraft Foods Group was formed through the splitting of parent Kraft Foods Global, Inc. in 2012, with its international snacks unit named Mondelez International, Inc. (MDLZ).

KRFT closed Tuesday's regular trading session at $61.33, down $0.79 on a volume of 3.36 million shares.