Kraft Foods Group Inc (NASDAQ: KRFT) announced on Tuesday, March 24th after market close that it will merge with H.J. Heinz Co. in a deal that will create the world’s fifth largest food and beverage company. Kraft shares shot up 33% in trading on Wednesday morning as a result.
The acquisition will be funded with the help of 3G Capital Partners L.P. and Warren Buffett’s Berkshire Hathaway Inc., who also assisted Burger King in its acquisition of the Canadian coffee chain, Tim Hortons. It is speculated that the deal will cost about $40 billion. Both Berkshire and 3G Capital Partners said they “are committed to long-term ownership of the Kraft Heinz Company.”
The combined company will be called Kraft Heinz Co. and is expected to have revenue of about $28 billion. Both companies hope the merger will help improve sales in the face of the shifting consumer appetite from processed food to ‘health-conscious’ options.
While Heinz shareholders will hold a 51% stake in the combined company, Kraft shareholders will hold a 49% stake and receive a special dividend of $16.50 a share.
John Cahill, Kraft Chairman and Chief Executive Officer said of the merger, “Together we will have some of the most respected, recognized and storied brands in the global food industry, and together we will create an even brighter future… This combination offers significant cash value to our shareholders and the opportunity to be investors in a company very well positioned for growth, especially outside the United States, as we bring Kraft’s iconic brands to international markets. We look forward to uniting with Heinz in what will be an exciting new chapter ahead.”
According to SmarterAnalyst, Canaccord Genuity analyst Alicia Forry upgraded her rating on Kraft from Sell to Hold with a price target of $70 on March 25th. She noted, “We had previously downgraded the shares (on 19th January 2015), given unexpected changes at CEO and CFO level and continued top line weakness, both at Kraft and in the US Food industry as a whole; margin progression has been good, so upside appeared liited to us. However, the potential bid is clearly a game-changer.”
Overall, Forry has a 100% success rate recommending stocks and a +5.7% average return per recommendation.
RBC Capital analyst David Palmer, who reiterated an Outperform rating on Kraft Foods on March 18th, also weighed in on the merger news, noting that Mondelez International , Pinnacle Foods , and B&G Foods could benefit while Campbell Soup , General Mills , and Kellogg could suffer. With that said, Palmer believes the next company that Kraft and Heinz will acquire could be Mondelez International. He noted, “An acquisition of Mondelez down the road would reunite Kraft’s global grocery brands (e.g. Philadelphia) and give Heinz’s international business needed scale.”
Palmer currently has an overall success rate of 77% recommending stocks and a +12.6% average return per recommendation.
On average, the top analyst consensus for Kraft Foods on TipRanks is Hold.