Kraft in Talks to Be Acquired by Brazil’s 3G Capital
A deal for food company would likely top $40 billion
3G Capital Partners LP is in advanced talks to buy Kraft Foods Group Inc. through its H.J. Heinz Co. unit, according to people familiar with the matter, in a combination of two iconic brands that would intensify the private-equity firm’s shake-up of the U.S. food industry.
Any deal likely would be valued at more than $40 billion. It could be announced soon, said one of the people, and, according to another, 3G would make it using Heinz. It also is possible the talks could fall apart before a deal is reached.
Kraft and many other U.S. packaged-food giants have struggled with rapid changes in consumer tastes that have curbed sales and exposed overcapacity. That has spelled opportunity for 3G—an acquisitive Brazilian firm known for buying consumer companies it considers bloated and aggressively slashing costs.
The Wall Street Journal previously reported that 3G was looking for targets after it recently raised some $5 billion for deal making. The firm already has become a major player in the food sector. Billionaire co-founder Jorge Paulo Lemann was a big shareholder in brewer InBev, and helped engineer its 2008 acquisition of Anheuser-Busch.
In 2013, 3G teamed up with investor Warren Buffett’s Berkshire Hathaway Inc. to buy Heinz and its stable of ketchup and frozen-food brands for $23 billion—a deal widely viewed as a wake-up call for other established food companies.
In 2010, 3G took private fast-food restaurant Burger King Worldwide Inc. Last year, 3G bought Canadian coffee-and-doughnut retailerTim Hortons Inc. through its Burger King holding. The $11 billion deal was financed in part by Mr. Buffett.
3G’s Next Step May Involve Heinz… And Warren Buffett
Kraft had a market value of roughly $37 billion, before the Journal reported news of the possible deal late Tuesday. While it isn’t clear what price the two sides are negotiating, it could be well over that value, given typical premiums paid in takeover deals.
That would be a big bite for a private-equity firm, though 3G has proved itself capable of marshaling significant resources, especially with Mr. Buffett’s backing. Mr. Buffett has said he would work with 3G on another friendly takeover if the opportunity looks right. He couldn’t be reached Tuesday night for comment.
Acquiring Kraft would give 3G’s prize acquisition a way to grow. The firm has made major cost reductions at Heinz, laying off hundreds of workers and closing factories. But 3G has made clear that it wants to expand, something cost cuts alone can’t achieve.
Taking on Kraft, an even bigger company, would be 3G’s biggest operational challenge yet. Kraft, like Heinz is heavily focused on the U.S. market, where its brands—packaged-food staples such as Oscar Mayer deli meats, Cool Whip dessert toppings and Maxwell House coffee, in addition to its namesake cheese products—have been hit hard by consumers’ growing preference for fresher and healthier fare.
Kraft’s revenue last year was effectively flat at $18 billion, while net profit fell 62% to $1 billion, as it dealt with higher commodity costs and big charges related to post-employment benefit plans. The company has said it lost market share in 40% of its U.S. businesses and was flat in the rest.
Kraft has touted its leaner cost structure compared with other packaged food companies, having cut jobs and eliminated other costs.
At an industry conference in February 2014, Kraft’s then-chief executive, Tony Vernon, trumpeted improvements in the company’s productivity. But, nodding to the Heinz deal, he said: “The reality…is that with the likes of 3G now in our space, best-in-class overheads keep getting better, and we have more work to do.”
In December, Kraft unexpectedly named a new chief executive to replace Mr. Vernon, then 58 years old, who had been in the job for just over two years. A board member said at the time the company felt the need to accelerate the pace of change. Kraft Chairman John Cahill, then 57, took over as CEO.
After years of working at PepsiCo Inc. and Pepsi Bottling Group Inc., Mr. Cahill served as a partner at private-equity firm Ripplewood Holdings from 2008 to 2011 before joining Kraft, and analysts speculated that he might be more open to deal making.
Today’s Kraft was born in a huge corporate split in 2012, when it was spun off by its namesake, leaving an international snacks company now called Mondelez International Inc. Mondelez took on what were thought to be faster-growing global brands.
But Mondelez quickly turned to an aggressive cost-cutting plan, and brought activist investor Nelson Peltz onto its board—a move that relieved the pressure he had been putting on the company to consider merging with PepsiCo’s snack business.
Kraft has attempted to adapt its products to shifting tastes, such as by taking artificial coloring out of some of its macaroni-and-cheeses. It also has trumpeted a high-protein snack pack called P3—which combines meat, cheese cubes, and nuts—sold by its Oscar Mayer brand.Another recent effort stirred controversy: Kraft struck a deal to put The Academy of Nutrition and Dietetics’ “Kids Eat Right” logo on its single-sliced American cheese products, prompting ridicule from Comedy Central host Jon Stewart and criticism from members of the health-professionals group who said it shouldn’t have seemed to endorse the product.
Kraft has made headway revitalizing some older brands like Planters and Jell-O, but its efforts so far haven’t sparked a turnaround in sales and profits. “I don’t think Kraft has done as aggressive of a job in this regard as we need to,” Mr. Cahill said on a conference call last month.
Asked on that call whether he would support 3G-style cost cutting, Mr. Cahill declined to discuss Heinz but said “with respect to Kraft, I will tell you that as I see it today, there remains plenty of opportunity” to cut costs without jeopardizing sales growth.
3G has a different fundraising approach from most of its private-equity peers. The firm, formed in 2004, tends to turn to a small group of the world’s wealthiest investors, including Mr. Buffett and Pershing Square Capital Management LP’s William Ackman, for help funding its deals.
3G uses a process called “zero-cost budgeting,” in which each division of a company must justify its costs from scratch each year. Shortly after acquiring Heinz, for instance, 3G moved to close plants across the country and eliminated more than 1,000 jobs.
In February, Campbell Soup Co., thought to be another potential 3G target, announced plans to slash costs and adopt zero-based budgeting.
Unlike with typical private-equity firms, 3G’s founders like to invest for longer than the standard five- to seven-year timeframe.