Private-equity firm 3G Capital is looking to purchase Kraft Foods and its ubiquitous blue boxes of macaroni and cheese. The deal would add another consumer brand to its holdings, as the firm bets no one will give up pasta and ketchup.
Dana Cimilluca, Dana Mattioli and Annie Gasparro broke the story for The Wall Street Journal:
Private-equity firm 3G Capital Partners LP is in advanced talks to buy Kraft Foods Group Inc. in a deal likely to be valued at upwards of $40 billion, according to people familiar with the matter.
The investment firm would use H.J. Heinz Co., which it acquired two years ago, to make the investment, said one of the people, effectively merging the two well-known food companies.
A tie-up could be announced soon, said one of the people. It is possible the talks could fall apart before a deal is reached.
Kraft had a market value of roughly $37 billion, before The Wall Street Journal reported news of the possible deal late Tuesday. While it’s not clear what price the two sides are negotiating, given typical premiums paid in takeover deals, a sale of the food company could be valued at well over $40 billion.
3G—an acquisitive Brazilian firm known for buying consumer companies it considers bloated and aggressively slashing costs—has been looking for targets after it recently raised some $5 billion for deal making.
The New York Times story by Michael J. de la Merced detailed the many consumer brands that 3G has acquired:
Many in the deal community and in Brazil have speculated about when the acquisitive firm would seek out another big-name consumer brand. Previous rumors had centered on companies like Campbell Soup.
3G, through Burger King, last summer bought the Canadian coffee-and-doughnut institution Tim Hortons for about $11.4 billion, with the aim of creating a global fast-food empire whose offerings stretch from breakfast to dinner.
In the world of mergers and acquisitions, 3G has won acclaim both for its prowess in striking deals and in improving companies once acquiring them. The firm has a reputation for both solid management and relentless cost cuts. (At Burger King, for example, the firm sold off the restaurant chain’s corporate jet and did away with an annual $1 million party in Italy.)
In Kraft, Heinz and 3G would get their hands on a number of household names, including not only the namesake cheese but also Oscar Mayer deli meats, Maxwell House coffee and Planters peanuts.
The Bloomberg story by Jeffrey McCracken detailed Warren Buffett’s investment in the company and his loss of faith in the brand:
The current Kraft was created in a spinoff from Mondelez in October 2012. Mondelez inherited the company’s overseas snack businesses, giving it bigger growth opportunities internationally. Kraft, meanwhile, is focused on the U.S. While Kraft has a stable of household brands, including Velveeta and Philadelphia Cream Cheese, the company has struggled to reignite sales growth in a mature market.
Berkshire has been a longtime investor in Kraft, tracing back to a stake in its predecessor company, as Buffett acquired and held stakes in dominant consumer brands including Coca-Cola Co. The billionaire began paring his stake in Kraft Foods Inc. in 2010 after disagreeing with Kraft’s decision to sell its pizza brands to help pay for a takeover of Cadbury Plc.
Buffett criticized then-Kraft CEO Irene Rosenfeld for the Cadbury transaction and the sale of the pizza businesses. “Both deals were dumb,” he told Berkshire investors at the time.
Berkshire was the biggest shareholder of Kraft with a stake valued at $3.3 billion at the end of December 2010.
Buffett looks for targets that have strong brands, simple businesses and consistent earnings power. 3G, co-founded by Brazilian billionaire Jorge Paulo Lemann, is known for its ability to improve operations and cut costs.
But Dan Primack took it a step further in his Fortune story, writing a whole story speculating that Buffett was involved in the deal:
I say this with zero inside info, but I’d be very surprised if Buffett isn’t also somehow involved with this transaction.
For starters, he has been effusive in his praise for 3G, with whom he also worked on Burger King’s recent purchase of Tim Hortons.
Second, Kraft Foods fits pretty well into Buffett’s basic value investing model. How do we know? Because Berkshire is a longtime Kraft Foods shareholder (even though it cut way back in 2013).
Third, Buffett recently told Fortune that he eats “like a 6 year-old.” What do 6 year-olds like more than Kraft Mac & Chese?
If this deal goes down like recent 3G buyouts, then the formal announcement won’t be to far behind the leak. And it probably will have a deep-pocketed partner. If not Buffett, who?
Just because you say you have no insider information, doesn’t make that responsible journalism. But speculation aside, the deal (if it goes through) could be a great one for 3G. They have many opportunities to use Kraft products in other parts of their portfolios and they have a track record of owning consumer brands.
