The merger of Kraft Foods and HJ Heinz orchestrated by 3G Capital, the private equity vehicle of three Brazilian billionaires, will transform the global consumer industry to create the world’s fifth-largest food and beverage company.
Set up in 2004, 3G’s three founding investors Jorge Paulo Lemann, Marcel Telles and Carlos Sicupira have been on a multibillion-dollar buying spree of some of the world’s best-known consumer brands.
3G buys big
In 2013, Warren Buffett teamed up with 3G when his Berkshire Hathaway investment vehicle backed its $28bn deal to take US ketchup maker Heinz private.
Seven years ago, Mr Lemann helped engineer InBev’s $52bn takeover of Anheuser-Busch to create the world’s largest brewer. In 2010, 3G gobbled up Burger King in a $3.3bn deal, and last year — again with Mr Buffett’s help — bolted on the $11bn acquisition of coffee chain Tim Hortons to create Restaurant Brands, in which 3G owns a 51 per cent stake.
Synergies with Heinz . . .
The newly formed Kraft Heinz group will have combined revenues of $28bn as well as eight brands with a total value of more than $1bn each and five brands worth between $500m and $1bn each — providing 3G with “significant synergy opportunities”.
. . . and a desire to re-internationalise Kraft
“Although the 2012 demerger refocused Kraft on the US market, a critique of Heinz was that it was too US-centric,” says Martin Deboo, consumer analyst at Jefferies, noting that the international expansion could happen “organically, or acquisitively through further M&A”.
This could open up the possibility of Kraft Heinz acquiring international brands in the future, such as Unilever’s spreads business, which has been the subject of sale speculation.
“A deal like that would get them into Europe, and turn Kraft into a global leader in the spreads and margarine business,” Mr Deboo adds.
A trusted partner in Warren Buffett
Following the Heinz and Tim Hortons deals, Mr Buffett is highly supportive of 3G capital, describing them as “marvellous partners” in his annual letter to investors in February, adding that he would welcome the chance to work with the three men again.
The potential to squeeze Kraft’s costs
3G has forged a reputation as a ruthless cost-cutter. Kraft’s operating margin is around 18 per cent based on current industry consensus figures, which analysts say is “pretty decent” for a food company — but there is every expectation that 3G will go further.
“Zero base budgeting” is the term one analyst uses to describe the cost cutting strategy of the three dealmakers, who are all board directors at AB InBev.
“There are lots of stories — some probably apocryphal — about their relentless drive on admin costs at AB InBev,” says one analyst, noting its company-wide policy for staff to fly economy and buy their own stationery. When in New York, directors are said to stay in New Jersey hotels rather than expensive ones in Manhattan. Not that they seem to mind — the same analyst notes that performance is heavily incentivised with equity.
The Heinz acquisition further highlighted 3G’s cost-cutting prowess. “They’ve taken out more costs than people thought possible,” another analyst notes. “This has had an effect on the way investors see other quoted consumer companies in the US. They think ‘If Heinz can do it, why can’t you?’”