Warren Buffett’s latest elephant deal

Heinz Tomato Ketchup

On the hunt for a big buy, billionaire Warren Buffett has again teamed up with Brazilian private equity firm 3G.

They together bought Heinz in 2013, and now, Heinz will merge with Kraft Foods to create the third largest food and beverage company in the US and the fifth biggest in the world.

Heinz, controlled by Buffett's Berkshire Hathaway and 3G, would own 51% of the new firm.

The Kraft Heinz Company, and shareholders in Kraft, will hold 49%. The new company will have revenues of around $28bn and the chief executive will be Heinz's current boss, Bernardo Hees.

It's a giant of a consumer goods company, with around a dozen brands that each generate revenues in excess of half a billion dollars, including Jell-O, Maxwell House, Oscar Mayer, Planters, and Velveeta.

3G also owns Burger King and has become a major player in the food and beverage industry, having invested as well in Wendy's.

Cost savings

Kraft's shares have soared on the news. After all, revenues last year were flat and net profit fell 62% as the company lost market share in its US businesses.

The new company is aiming for substantial cost savings of $1.5bn by the end of 2017.

But, it's still an "elephant" for Buffett. Known for choosing companies with strong product lines, Buffet has described the deal as bringing together "two iconic brands".


And both companies have plenty of those, but are facing pressures from changing consumer tastes.

When I interviewed executives from Nestle and Unilever earlier this year, there was an optimistic sense that consumer spending is coming back that will help their bottom lines.

They also faced pressures, though, from consumer tastes that are changing, including in their attitudes toward processed foods and what happens to all that packaging.

I wrote before, for instance, about Unilever aiming for zero non-hazardous waste in their factories.

Warren Buffett is aiming for his slice of the food industry that accounts for an estimated 10% of world GDP, so that's a sizeable $7 trillion per year.

And he's doing so again with a Brazilian investor. That may surprise some, since there aren't many that come from emerging markets.

But Brazil is a commodity exporter and it's no wonder that 3G is eyeing the recovery in consumer spending that can turn lower agricultural prices into a virtue for food retailers.

Big 10

The trend in the global food and beverage industry is certainly creating giants.

Just 10 companies control nearly all of the packaged foods that we buy.

Nestle, Unilever, Coca-cola, PepsiCo, Danone, Mars, Mondelez International, Kellogg's, General Mills and Associated British Foods are among the companies that generate more than $1bn in sales each day around the world.

With this merger, Kraft Heinz will jump into the mix.

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