The food industry just got a new mega-competitor following the merger of Kraft Foods with Heinz. The new company, called the Kraft Heinz Company, hit the market on Monday and was trading around $73 per share on the NASDAQ. Financed in large part by billionaire Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A), Kraft Heinz is expected to become the fifth-largest food and beverage company in the world and the third-largest in the United States.
In 2013 Buffett’s Berkshire Hathaway joined with private equity firm 3G Capital to acquire Heinz. At the last year’s Berkshire Hathaway shareholders’ meeting the audience was thrilled with the prospect of having 3G Capital continue to partner with them following the successful Heinz transaction. “They’re (3G Capital) very smart, they’re very focused. They’re very determined. They’re never satisfied.”
Gabelli & Company analyst Macrae Sykes noted that there were some questions about whether the “operating cultures” between Berkshire Hathaway and 3G Capital were compatible and would continue to yield positive results for both companies. However, these concerns were quelled, and Mr. Buffett pledged to continue to partner with 3G Capital in future projects such as the Kraft Heinz merger.
3G Capital is known for cutting costs and jobs to boost margins which have given them a competitive advantage in past ventures and investments; these capabilities are going to be extremely useful as Kraft Heinz goes through the merging process.
Initially, Berkshire Hathaway invested $12 billion in Heinz. As part of the Kraft deal, Berkshire Hathaway advanced an additional $5 billion. Kraft Heinz has now become Berkshire Hathaway’s second largest investment following their $26 billion stake in Wells Fargo & Co. Berkshire Hathaway now owns more than 325 million shares of Kraft Heinz, according to the SEC, totaling about $42 billion in equity.
For Buffett, whose net worth is upwards of $72 billion, Kraft Heinz is not his first venture in the food industry. Buffet also owns stakes in Coca-Cola and Burger King’s parent company Restaurant Brands. In April 2008, Berkshire Hathaway joined together with Mars and bought gum company Wrigley. Berkshire Hathaway is also the sole owner of See’s Candies and Dairy Queen. This experience in the food industry provides Berkshire Hathaway with valuable tools to create a monopoly in one of the most competitive industries.
Since the merger, major changes at Kraft Heinz have already been implemented including slimming the company’s expenses by letting go of several Kraft executives. The company has also planned to cut $1.5 billion in annual costs by the end of 2017. These changes will make Kraft Heinz leaner and enable more flexibility while the business merges the two companies together. The initial focus of the merger will be eliminating duplications and improving deficiencies to create a strong, unified company. With the financial backing of Warren Buffet and Berkshire Hathaway, Kraft Heinz will undoubtedly be a force to reckon with in the food industry.