We are searching data for your request:
Upon completion, a link will appear to access the found materials.
Berkshire Hathaway and 3G Capital make $23 billion dollar deal to buy Heinz
When you think of Heinz, you probably think of the ketchup bottle (sometimes painted red, sometimes honest, clear plastic) sitting on the shelf in your fridge. What you’re probably not thinking about is $23 billion dollars.
On Thursday, Warren Buffet, chief executive of Berkshire Hathaway, and Jorge Paulo Lemann, financier for Brazil’s 3G Capital, made a $23 billion dollar deal to buy the 144 year-old condiment empire. Berkshire and 3G will split the $23 billion fee evenly but will assume different roles in the takeover. Meyer Shields, a Stifel, Nicolaus & Co analyst, told the Wall Street Journal, "Berkshire is funding 3G's acquisition rather than taking control.”
Heinz has been proving its stability in the market lately with its stock rising 17 percent over the last 12 months and Buffett and Lemann look forward to helping the company grow. They both believe that “Heinz has strong, sustainable growth potential based on high quality standards, continuous innovation, excellent management and great tasting products” and are excited about the new partnership, according to a release.
The deal will be funded with cash provided by both companies along with some financing by J.P Morgan and Wells Fargo. Berkshire and 3G will also respect Heinz’ wishes and leave the headquarters where they were originally stationed in Pittsburgh.
Skyler Bouchard is a junior writer for the Daily Meal. Follow her on twitter at @skylerbouchard.
How Heinz Website Energized Food Pros
How do you get food service people excited about ketchup? Heinz said it found the secret sauce in a new website that engages professionals, like restaurateurs and suppliers.
H.J. Heinz Company, sold in February to Warren Buffett and a Brazilian private equity firm for $23.3 billion, launched HeinzFoodService.com in 2012.
Amy Kleppinger, associate research manager of Heinz Consumer and Customer Insights, said the company has been working with food service professionals for the past three years, trying to become a resource for them.
"Food service professionals are difficult to talk to because they are busy," Kleppinger said, often having 16-hour days without being able to stop in their offices. "Having the ability to connect with these folks and have a sense of what's important have been such huge aspects for Heinz."
The company said the website had the highest level of monthly visits last month since launching last year at 10,000 visits and growing. It's not a earth-shaking number compared with, say Facebook's billion monthly active user-base, but for the non-consumer food service market, the number comes as a surprise even to Heinz.
The most popular article month after month, Heinz says, is about bulk back-of-house packaging, which describes the packaging innovation and advantages of tin cans, pouch packs or dispensers.
Josie Cellone, digital marketing manager with Heinz Group57, said these seem like simple innovations around condiment usage, but food service professionals have different needs when they're making recipes, or when they have to determine how to make the line go faster in a cafeteria.
"As a consumer, it seems seamless," Cellone said.
Especially surprising has been the number of returning visitors.
"A lot of operators go to manufacture websites once a year for 'spec sheets'," said Cellone. "We wanted to disrupt that behavior and give them content so they come back week after week and month after month."
Last week, Heinz, based in Pittsburgh, added a section on the site dedicated K to 12 food service directors, meeting the demand of school cafeteria chefs across the country.
"They have to be experts around regulation, calorie counts, and nutrition requirements they have to comply with," said Cellone. "We want to be their experts and resource."
Heinz, with the talents of Communispace, a consumer collaboration agency, said it didn't know what to expect when building a community of competitive food service industry professionals. Communispace had worked with Heinz for six years on a number of other communities.
You name it, Heinz has it. Want to know how to clean your ketchup dispensers? Try HeinzDispenserCare.com. Want to make a merchandise order? HeinzMerchandising.com.
The chefs, however, also wanted to engage with other food service professionals, sharing ideas for Mother's Day brunches and March Madness.
"The more we talked to [food service] operators and the more we understood what chefs want, the more we understood they were collaborative," said Kleppinger. "And ultimately, that was a big 'a-ha' for us. This is a group that would really benefit in having a two-way dialogue."
Heinz '57 Dip Recipe
When my husband and I were first married I came across this dip recipe and we used to use it as a Beef Fondue dip. Haven't had a Fondue in many years but use it also as a veggie dip and it'd be good on hamburgs and whatnot as well. Read more Very flavourful and easy to whip up! Enjoy! See less
- heinz '57 sauce
- nothing specific
Schedule your weekly meals and get auto-generated shopping lists.
- 1/2 cup mayonnaise
- 1 tbsp. Heinz '57 sauce
- 6 drops Tabasco
- 1 tsp. Worcestershire sauce
- 1 tbsp.finely grated Parmesan cheese
- 1/4 tsp. garlic powder
- 1/2 cup mayonnaise shopping list
- 1 tbsp. Heinz '57 sauce shopping list
- 6 drops Tabasco shopping list
- 1 tsp. Worcestershire sauce shopping list
- 1 tbsp.finely grated Parmesan cheeseshopping list
- 1/4 tsp. garlic powder shopping list
How to make it
People Who Like This Dish 12
- JABNJENNNowhere, Us
- ellie1Nowhere, Us
- sparow64Sweetwater, TN
- SadiesMomNowhere, Us
- MissouriFarmWifeOzarks, Missouri
- Good4UPerth, Canada
- NPMarieMagalia, CA
- clbaconBirmingham, AL
- notyourmommaSouth St. Petersburg, FL
- ttaaccooBuffalo, NY
- Plus 2 othersFrom around the world!
We absolutely loved this on burgers. We also had it on meatloaf, and Pete used it on his sandwiches for lunch. All delicious!!
I found it too rich on the veggies though, I think I'd add some sour cream or buttermilk to it if I used it as a vegg. more
Get in Touch
Take Note We will not respond to member emails. Use the Help Forum for that.
The World’s Favourite Ketchup
Heinz® Ketchup was introduced in 1876 by Henry John Heinz, a packaged foods pioneer who was dedicated to quality, wholesome nutrition and innovation. The cover of this report illustrates Heinz Ketchup packaging innovations and the years they were introduced, including the original glass bottle, the ketchup packet, the plastic bottle, the top-down bottle and Dip & Squeeze™, a great new way to enjoy the thick, rich taste of Heinz Ketchup. Today, we sell about 650 million bottles of Heinz Ketchup and 11 billion packets each year across six continents, making our iconic brand The World’s Favorite Ketchup®.
Published by Nick McCullum on September 4th, 2017
In March of 2013, 3G Capital and Berkshire Hathaway closed on the acquisition of Heinz, privatizing this foodmaker for a total acquisition price (including debt) of around $28 billion. 3G’s cash contribution (the acquisition made significant use of debt) was just $4 billion.
Fast forward to 2015, and 3G Capital and Berkshire Hathaway made another transformative merger in the food industry. This time, the two companies arranged for a merger between publicly-traded Kraft Foods and privately-held H.J. Heinz to create publicly-traded Kraft Heinz (KHC).
Well, at the time of Kraft Heinz’s most recent proxy statement, 3G Capital owned 290,727,687 shares of Kraft Heinz, amounting to 23.8% of the company’s publicly-traded common shares, with a current market value of approximately $23.5 billion. For context, the Brazilian investment firm invested only $4 billion of cash into the deal when it bought Heinz, and an additional $5 billion when it merged with Kraft.
Think about thatG has invested, in aggregate, just $9 billion into this consumer foods conglomerate and currently has a stake of $23.5 billion. 3G’s stake has more than doubled in a few short years, although this reflects the company’s significant use of debt to acquire the inaugural Heinz shares. In any case, the company appears to be doing something special.
With that in mind, this article will provide a detailed case study on 3G Capital’s into Heinz (and Kraft Heinz) to determine how the company was able to build such substantial shareholder value.
Who is 3G Capital
3G Capital is a Brazilian investment firm that is most well-known for its laser-like focus on cost-cutting at its investees and on retaining and developing the best managerial talent.
3G’s name comes from having three founders:
These three founders are the inspiration for the ’ in 3G’s name and are the source of the company’s relentless focus on operational efficiency.
“Costs are like fingernails: they always have to be cut.” – Carlos Sicupira, one of 3G’s Founding Partners
3G Capital’s Founding Partners are pictured below.
The first creation of these three business partners was the Brazilian investment bank Banco Guarantia. The “G” in Guarantia contributes the “G” in 3G Capital’s name. Guarantia was sold to Credit Suisse in the late 1990s.
As mentioned, one of 3G Capital’s most notable characteristics is the firm’s focus on cost control. The company makes avid use of a concept called zero-based budgeting to improve the operational performance of the companies it invests in.
Zero-based budgeting, or ZBB for short, is significantly different than normal budgeting procedures. In a traditional budgeting process, managers begin with the prior period’s budget, review financial performance and then make adjustments based on assumptions about future operating conditions. Only new expenses must be approved after closing the books on a completed reporting period.
Zero-based budgeting is different because managers will start with a blank budget for each time period. By building the budget from the ground up, managers are forced to justify every expense, which naturally improves operational efficiency over time.
Despite its effectiveness, zero-based budgeting is unpopular for two reasons.
First, it is highly disruptive. Entire departments can be eliminated after a zero-based budget analysis determines them to be a poor use of shareholder capital. In the past, these inefficient business units remained operational simply because they had always been there. The propensity for zero-based budgeting to cause layoffs and other slashes to corporate expenditures are the first reason why this managerial technique is not fully appreciated.
The second factor is up-front cost. Zero-based budgeting is highly expensive to implement in the beginning, resulting in large accounting charges that are later ‘paid back’ by recurring cost savings delivered by the leaner organizational structure.
Intuitively, it is not surprising that ZBB is expensive to executive. Zero-based budgeting requires extensive analysis. It often involves the use of external consultants who perform detailed cost-volume-profit calculations on each department of a corporation. With that said, zero-based budgeting still makes sense after accounting for the initial required investment, particularly when managers operate with a long-term orientation.
Without a doubt, 3G Capital is best known for its ruthless cost-cutting. The firm also has other notable characteristics that are not as well-covered by the media but deserve some attention in this analysis.
First of all, 3G Capital has a profoundly experimental culture. The firm is known to be a leader thanks to its continuous improvement through experimentation in marketing, product development, and operational efficiencies (unsurprisingly). With that said, 3G is quick to shut down experiments that have a poor long-term outlook.
The following quote from one of 3G’s founders, Marcel Telles, illustrates this:
“Any idea or innovation needs to be prototyped… Most innovations you can prototype in a very basic and simple way to understand the first feeling of the product for a company or a group of consumers. After going through this first stage it looks a lot like venture capital. ‘Oh yeah, okay, here is $50,000 for you, in three months show me a little more.’ Three months from now there are ten guys showing off their work, two are going to be good, you have to be merciless in cutting those that do not deliver what you want.”
3G Capital also makes extensive use of consultants, particularly with regards to creating budgets and identifying cost savings opportunities. Accenture is the consulting firm that 3G Capital has used in the past (most notably for the Burger King, Tim Horton’s, and Heinz deals) the two firms appear to have a very strong business relationship.
The last important characteristic of 3G Capital that we will discuss in this article is the company’s meritocratic management approach. 3G is very willling to reward employees that work extremely hard and deliver spectacular business performance conversely, the firm is quick to cut underperformers.
The firm also pays very little attention to age. If the best employees of one of its investees happens to be young, they will be promoted nonetheless.
This focus on performance with no regard to age can be tangibly observed by looking at Burger King’s senior management changes after 3G’s appointed CEO (Bernardo Hees, one of 3G’s non-founding Partners) left for Heinz. Hees’ successor, Daniel Schwartz, was only 33 years old when he became CEO (he was CFO previously). Schwartz’ successor as CFO was only 26.
Without a doubt, 3G Capital is a unique organization and has characteristics that are unlike many of its peers. These traits have undoubtedly contributed to some of the firm’s tremendous successes over the years:
- The world’s largest beer company, AB InBev, saw EBITDA margins soar from 23% to 37% after 3G Capital initiated a stake in the company
- 3G Capital grew Burger King’s profits by 33% in the two years after purchasing the company, and performance has continued to be strong after the firm merged Burger King with Tim Horton’s and Popeye’s to form Restaurant Brands International
3G Capital also has an excellent reputation among other members of the activist investment community. Bill Ackman of Pershing Square Capital Management has said the following of 3G Capital.
“Everyone talks the talk [about efficient management], but 3G really does it. These guys are the best.”
If you’re interested in reading more about 3G Capital’s style of running businesses (but not specifically their involvement with Heinz), the following articles can provide some useful insights:
Moving on, the remainder of this article will discuss 3G Capital’s involvement with Heinz in detail.
3G Capital’s Investment in Heinz
3G Capital’s original investment in Heinz happened back in 2013. More specifically, 3G Capital and Berkshire Hathway together paid $28 billion (including the assumption of debt) to acquire and privatize the Heinz business effective March 30, 2013.
Headquartered in Pittsburgh, Heinz is the leader in the ketchup industry, and also has a significant presence in frozen foods, soups, beans, pasta meals, and infant nutrition.
In fiscal 2012, the most recent year before the company was privatized, Heinz generated revenues of $11.6 billion. The geographic breakdown of Heinz’s fiscal 2012 revenues was a testament to the food maker’s high degree of geographic diversification Heinz generated just 40% of sales in the United States, with the remainder coming from abroad.
The price that the two firms paid for Heinz’s then-publicly-traded common shares was expensive by any quantitative yardstick of value. The purchase price of $72.50 per share was 20% higher than the stock’s closing price on the day prior to the announcement and 19% higher than Heinz stock’s all-time high.
Berkshire Hathaway and 3G Capital owned Heinz’s common equity 50-50 following the purchase, with each firm putting up about $4 billion in cash for the purchase. The remainder of the acquisition was financed with bank debt. The significant leverage used in the transaction served to magnify the impressive returns generated by 3G and Berkshire.
Berkshire Hathaway also contributed an additional $8 billion to receive a tranche of preferred shares that pay a 9% annual dividend.
All said, the deal was worth $23 billion, or $28 billion including the assumption of debt of Heinz’s debt (these figures do not include the price that Berkshire paid for its separate-but-related preferred stock investment).
Unlike many private equity transactions, it appeared that both firms planned to be the owners of Heinz for the long run. Buffett, in particular, seemed interested in accumulating a larger interest in the ketchup giant, saying the following in an interview following the transaction’s close:
“We may increase our ownership if any members of the 3G Group ultimately want to sell out later.”
Indeed, Berkshire and Buffett must have been pleased with the work that they had completed with 3G Capital, as this was not the last deal that the two firms orchestrated together. In 2014, Berkshire was one of the main financiers of 3G Capital’s $13.3 billion acquisition of Tim Horton’s, which is merged with Burger King and spun-off as Restaurant Brands International (QSR) later.
Additional details of the exact terms of the transaction can be read in the following article:
So how exactly did 3G Capital manage to improve performance at Heinz?
There are three main strategies used:
- Methodical cost-cutting
- Management & culture changes
- A focus on efficiency and operational improvements
Given the overview of 3G’s investment strategy provided earlier in this analysis, the changes that the firm made at Heinz are relatively unsurprising.
What is more surprising is how quickly 3G enacted changes.
Ten days after the deal had closed, Heinz’s 50 top executives met at Four Seasons hotel in San Fransisco at their regular annual offsite.
Typically, the event had a rather straightforward agenda: strategy meetings, market commentary, and a speech from Heinz’s long-time Chief Executive Officer Bill Johnson.
This year was significantly different. Because of 3G’s reputation for ruthless cost-cutting, many of the 50 executives in attendance wondered if this would be the last time the event was held. Job safety was also a significant concern.
The aforementioned Heinz CEO, Bill Johnson, had handed the reins of his company to Bernardo Hees, a non-founding Partner from 3G Capital. This year’s leadership summit gave Hees the opportunity to present his vision for the ‘new’ Heinz: to be the world’s most efficient food company.
Hees acted quickly. During the same annual offsite, many executives were summoned to a side conference room where some were informed that they no longer had a future with Heinz. Importantly, it was not ruthless firing Heinz allowed the executives to leave with fully vested stock options and unchanged retirement plans.
In their place, Hees often eliminated management roles completely. In other cases, the new executive replaced them with competent managers that he had worked with at other 3G Capital businesses, or, more rarely, other individuals from the Heinz organizational chart. Often, the replacements that Hees chose to fill these roles were significantly younger than their predecessors, which emphasizes 3G’s meritocratic approach to talent management.
The impact of 3G Capital’s executive cost-cutting is hard to overstate. In the August after 3G’s investment closed (recall that the transaction was completed in March), Heinz announced the layoff of 350 of its 1,200 full-time staff at headquarters. This amounts to a headquarters head count reduction of 29%.
3G Capital aggressively attacked Heinz’s other fixed costs (outside of salaries). Many of Heinz’s corporate jets were sold, and the company quickly found a way to merge its two corporate headquarter buildings into one. 3G promised to kept the company headquartered in Pittsburgh, given Heinz’s rich history in the city. If this were not the case, it is possible that 3G would have relocated the city completely to a more desirable (think New York) or affordable location.
We have seen earlier in this article that the financial impact of 3G Capital’s previous investments has been extraordinary.
How did the Heinz investment perform in comparison?
In the two years following 3G’s original investment in Heinz, the foodmaker’s net profit margin expanded by a remarkable 58%, to 28%. For context, Bernstein Research estimates that the average profit margin in the food industry is about 16%, implying that Heinz – after intervention from 3G – generates about 75% more net income for every dollar of sales when compared to the industry average.
This is an amazing achievement. With that said, 3G Capital’s work is far from over.
After making significant progress at the original Heinz business by taking it private in conjunction with Berkshire Hathaway, 3G Capital executed a significant merger with publicly-traded Kraft Foods, creating food conglomerate Kraft Heinz (KHC).
Looking ahead, there have been rumors that Kraft Heinz is looking for another merger candidate, continuing the company’s streak of accretive acquisitions.
Unilever (UL) in particular was noted in several M&A rumors to be an acquisition target for Kraft Heinz in recent months.
Importantly, though, the company does not need acquisitions to drive future growth. The following quote from a 3G Capital representative illustrates this point nicely.
“Kraft Heinz doesn’t need another acquisition to drive profitable growth for the long term. As always, we will evaluate any opportunity that makes strategic sense, with the objective of growing for the long term, whether in the US or internationally.” – Alex Behring, Parter at 3G Capital
3G Capital’s investment in Heinz is a phenomenal case study on the importance of cost management and the incredible impact that management changes can have on corporate profitability.
This article is by no mean a complete history of 3G Capital’s involvement with Heinz.
If you’re interested in reading more about the company’s remarkable turnaround, the following articles may be of interest to you:
You can also learn about Kraft-Heinz’s recent financial results in the following video:
Heinz’s brands include Heinz Tomato Ketchup, which launched in 1876 and has become the most popular ketchup brand in the U.S. Hundreds of millions of bottles sell worldwide each year. Heinz also sells Dip & Squeeze, small ketchup packages designed to be used one-handed, to U.S. fast food restaurants. (For more, see also: 6 Companies Kraft Heinz Could Swallow Up Next.)
Household name products under the Heinz brand also include Heinz Beanz, which was introduced in 1901 as “Heinz Baked Beans.”
The Brazilians Behind the Heinz Deal
LM Otero/Associated Press 3G Capital Management took Burger King Holdings private in 2010.
Warren E. Buffett’s $23 billion acquisition of H. J. Heinz, a quintessentially American company, is almost a caricature of a Buffett acquisition.
But Mr. Buffett’s partner in the deal, the Brazilian-backed investment firm 3G Capital Management, has also shown a craving for iconic American businesses.
3G, whose principal owner is the billionaire financier Jorge Paulo Lemann, adds ketchup to a portfolio that has included burgers and beer. Mr. Lemann played a major role in the multibillion-dollar merger of the Brazilian-Belgian beer giant InBev with Anheuser-Busch.
And in 2010, 3G took Burger King Holdings private in a leveraged buyout valued at about $3.3 billion. In April, just 18 months after taking it private, 3G sold shares of Burger King back to the public, but still retains majority ownership of the company. The firm has also previously invested in Wendy’s.
The ascendance of 3G and Mr. Lemann as major players on the global mergers-and-acquisition stage reflects the rise of Brazil as an economic power. Armed with strong balance sheets and a growing domestic economy, Brazilian companies have emerged as prominent buyers of American companies. In 2009, for instance, the Brazilian beef company JBS paid $800 million for a majority stake in Pilgrim’s Pride, the Texas chicken company.
Mr. Lemann, 73, who is worth $19.1 billion, according to the Bloomberg Billionaires Index, is said to have come up with the idea to buy Heinz and brought it to his friend Mr. Buffett. The two men have known each other for decades, having served together on the board of Gillette. Berkshire Hathaway is also a large shareholder of Anheuser-Busch InBev. Mr. Lemann and his partners serve on the Anheuser-Busch InBev board.
Mr. Lemann, whose Swiss father emigrated to Brazil a century ago, is a former Brazilian tennis champion who played at Wimbledon. He has lived in Switzerland since 1999, after an attempted kidnapping of his children.
He has been a major player in Brazil since the 1970s, when he acquired a small financial firm and built it into Banco de Investimentos Garantia, one of Brazil’s largest investment banks. Credit Suisse acquired his company for about $675 million in 1998. He and his business partners also gained control of a Brazilian brewery and built it into AmBev, one of the world’s largest beer companies.
The point person on the transaction for 3G, which houses its investment operations in New York, is Alexandre Behring. Known as Alex, Mr. Behring is a Brazilian native who graduated from Harvard Business School in 1995 and lives in Greenwich, Conn.
Another tidbit about 3G: for several years, it employed Marc Mezvinsky, the husband of Chelsea Clinton. Mr. Mezvinsky left 3G in 2011 and has since set up is own hedge fund.
John Kerry and Heinz
Claim: Senator John Kerry’s wife owns Heinz, a company that outsources much of its work abroad.
Example: [Collected on the Internet, 2004]
Factories located at: Taipei, Taiwan (makes Heinz baby foods) Dublin, Ireland Paris, France Dovarmenez, France Lisbon, Portugal Madrid, Spain Milan, Italy Monguzzo, Italy Athens, Greece Warsaw, Poland Pudliszki, Poland Wodzislaw, Poland Miedzychod, Poland Moscow, Russia
Georgievisk, Russia Cairo, Egypt Tel Aviv, Israel Haifa, Isreal Elst, The Netherlands and plants there Brussels, Belgium Dusseldorf, Germany Seesen, Germany Turnhout, Belgium Rovereto, Italy Chateaurenand, France North York, Ontario, Canada Wheatley, Ontario, Canada Caracas,Venezuela San Jose, Costa Rica Johannesburg, South Africa Gaborone, Botswana
Harare, Zimbabwe Cheguta, Zimbabwe Wellington, South Africa Melbourne, Victoria, Australia Republic of Singapore Auckland, New Zealand Tokyo, Japan Guangzhov, People’s Republic of China (makes infant cereal) Qingdao, People’s Republic of China (makes infant foods, ketchup, mayonnaise
& puree) Inchon, South Korea (makes Heinz products and StarKist) Bangkok, Thailand Mumbai, India Jakarta, Indonesia Surabaya, Indonesia Manila, Philippines Wanchai, Hong Kong.
Also recently purchased from Bordens these products: Classico Pasta Sauce Aunt Millies Pasta Sauce Receipt Soups Wylers Bouillons & Soups.
Think of the conflict of interest a President would have who’s wife owns business interests in all of these countries and others. Pass it on.
Origins: In 1995, Senator John Kerry of Massachusetts wed Teresa Heinz, whom he first met at an Earth Day rally in 1990. Born
Teresa Simões-Ferreira in Mozambique to Portuguese parents, was previously married for to Henry John , who was a member of the founding family of the H.J. Heinz Company and represented Pennsylvania for twenty years in both the of Representatives and the Senate prior to his death in a plane crash in 1991. inherited a Heinz family fortune estimated at over
Although Senator Kerry has been critical of the Bush administration for rewarding “Benedict Arnold CEOs” who move “profits and jobs overseas,” the above-quoted attempt to link Kerry (through his wife) with the very outsourcing he decries is flawed in two major ways. First off, Teresa Heinz Kerry does not “own the Heinz Corporation” has no involvement whatsoever with the management or operations of the Company, nor does she own anything close to a controlling interest of the company’s stock. According to Heinz itself, the Heinz family trust which inherited sold most of its shares of Heinz stock back in 1995 and currently holds less than a 4% interest in the company:
There is no connection between any philanthropic programs of the Company and its Foundation and the Heinz family interests (including the Howard Heinz Endowment, the Vira Heinz Endowment, and the Heinz Family Philanthropies).
(A 4% stake in a company as large as Heinz still represents a considerable amount of money, but it isn’t nearly large enough a share to give the holder any significant control or influence over the company’s business decisions.)
Moreover, the Heinz Company’s operations are not an example of the type of outsourcing that is currently a hot political issue (i.e., sending out work to offshore companies to provide services which a company might otherwise have employed its own staff to perform). Heinz is a global business which sells its products in dozens of other countries, and like other food companies it has to localize some of its production at factories located in its foreign market areas. (It makes little sense from either an economic or a freshness standpoint to be shipping fruits and vegetables and/or finished food products halfway around the world rather than producing them locally.) One wouldn’t expect, for example, every can and bottle of Coca-Cola sold anywhere in the world it be Australia, China, or be produced by U.S. bottlers.)
As the Company notes, well over half its sales come from foreign markets, and it therefore operates overseas facilities to serve those markets:
Hormel Foods Acquires Planters Brands for $3.35 Billion
Hormel Foods has entered into a definitive agreement to acquire the Planters snack nut portfolio from the Kraft Heinz Company in a cash transaction for $3.35 billion. The proposed transaction is expected to close in the first half of 2021, subject to regulatory review and approval.
According to a press release, the transaction includes most products sold under the Planters brand, including single variety and mixed nuts, trail mix, NUT-rition products, Cheez Balls, and Cheez Curls, as well as Corn Nuts branded products. The transaction also includes global intellectual property rights to the Planters brand, subject to existing third-party licenses in certain international jurisdictions, and the Corn Nuts brand.
“The acquisition of the Planters business adds another $1 billion brand to our portfolio and significantly expands our presence in the growing snacking space,” said Jim Snee, chairman of the board, president and chief executive officer of Hormel Foods.
“Our competencies in brand stewardship, revenue growth management, e-commerce, innovation, and consumer insights will be key to driving growth for the Planters® brand and our customers,” Snee added. “We also expect significant synergies as we integrate this business into our One Supply Chain and Project Orion system.”
Under the terms of the agreement, Kraft Heinz will sell its Corn Nuts production facility in Fresno, Calif., and Planters production facilities in Fort Smith, Ark., and Suffolk, Va. These facilities and their employees will continue to operate in the ordinary course.
“This is another momentous step in our rapid transformation of Kraft Heinz,” said Kraft Heinz CEO Miguel Patricio. “It will enable us to sharpen our focus on areas with greater growth prospects and competitive advantage for our powerhouse brands. Within our Real Food Snacking platform, this means more aggressively driving real fuel for kids through Lunchables and real meal alternatives like P3.”
Hormel Foods Corporation, based in Austin, Minn., is a global branded food company with over $9 billion in annual revenue across more than 80 countries worldwide.
The creepy reality behind the Heinz-Kraft mega-deal
The big news in the business world this week was the merger of H.J. Heinz Co. with Kraft Foods Group Inc. The coverage was accordingly breathless: a "blockbuster" and a "mega-deal" that sent Kraft's shares "soaring" 35 percent.
Back in 2013, Berkshire Hathaway and the Brazilian private equity firm 3G Capital bought out Heinz for $23 billion. Now they’ll be effectively acquiring Kraft to create the new Kraft Heinz Co., and taking the whole thing public again. Heinz shareholders will own 51 percent of the new company and Kraft shareholders will own 49 percent. The latter group will also get a deal sweetener, to the tune of $16.50 per share, which will be paid for by a combined investment by Berkshire Hathaway and 3G of $10 billion. Bloomberg View's Matt Levine estimated the equity value of the new hybrid company at $82 billion, and its enterprise value at $110 billion.
Lord knows those are big numbers, and given the players involved you can see why it's been covered as a moment of high drama. But shares and stocks and financial markets and all that exist, supposedly, to better coordinate economic activity to the benefit of us concrete human beings. This sort of abstracted financial narrative tends to obscure that premise, as well as the creepier trends this deal is arguably an example of.
Heinz makes products like ketchup, soup, beans, and sauces. Kraft counts Jell-O, Kool-Aid, Maxwell House, Oscar Mayer, and Velveeta among its various brands. Just how much those products contribute to the common human welfare can be debated. (Personally speaking, I will cut any health nuts that come between me and my Kraft Mac and Cheese.) But there are also thousands of workers in America and elsewhere who are involved in making those products. That's how they make their livelihood, which in turn helps support their families, gives them the resources and security to participate in their communities, and contributes to the general social fabric.
3G Capital has a reputation for aggressively acquiring companies like Burger King and slicing them down to size. After 3G and Berkshire Hathaway took Heinz private, they cut 600 jobs from the company in the United States and Canada. Globally, Heinz had reportedly cut 6,650 positions as of this month.
"We regret the impact this has on Heinz employees and their families," Heinz Spokesman Michael Mullen said back in 2013.
In addition to Heinz's 6,800 North American employees, Kraft brings roughly another 22,000. Sam Ro did some back-of-the-envelope calculations in Business Insider, based on the deal's anticipated "synergies," and estimated over 5,000 people could be let go.
Now, Heinz and Kraft are in a tough spot. They're both in the commodities business: selling goods that meet everyday needs, but are hard to differentiate from one another. You can try different recipes, branding, or marketing, but at the end of the day ketchup is pretty much ketchup. This can create what business people bitterly refer to as "commodity hell" — a circumstance in which you can't compete on anything but price. Everyone underbids each other until revenues begin to bump up against costs and profits vanish.
Kraft's profits fell 62 percent to $1 billion last year, thanks to higher commodity costs and its employee benefit plans. Meanwhile, Heinz's sales have been sliding in North America and elsewhere, and both companies have reportedly been hit by the cultural shift towards more natural or organic food products.
Faced with these challenges, you can understand companies retooling or even cutting down their size and operations. What's less understandable is seeing them do this, not for the sake of maintaining those jobs and that productive economic activity, but for the sake of rich rentiers.
"This combination offers significant cash value to our shareholders," exclaimed John Cahill, the chairman and CEO of Kraft and the future vice-chairman of Kraft Heinz Co.
Well, sure, but so what? That $10 billion Buffett and 3G pumped into the deal is a lot of money! It could create a lot of jobs and productive capacity. Alexia Howard, a U.S. food analyst at Sanford Bernstein, noted that while the deal might make sense "from a profit perspective and a shareholder value perspective," Heinz's frozen food business is still shrinking. And it did so even as 3G’s housecleaning made it more profitable — meaning those profits weren't due to new economic value creation, but just to dissolving parts of the company to create cash payouts for shareholders.
There's no indication this latest merger is actually going to respond to the real challenges Heinz and Kraft face in the economy. That $10 billion could have gone to creating a new line of product to give Kraft Heinz Co. an edge, for example.
The conventional wisdom is that this is how financial markets efficiently allocate capital in the economy. Maybe there just isn't any way to make Kraft and Heinz more productive, so parts of them should be liquidated into cash, and then reinvested in other companies with better prospects.
Except if you actually look at the financial system as a whole, that isn't what's happening. Since the rise of stock buybacks in the 1980s, shareholders have, on balance, actually been draining capital from companies. The stock market has begun to operate like a plague of locusts, consuming swaths of the American economy and digesting it into cold hard cash. Then that cash just sits at the top of the economy, going through the same cycle over and over without translating into real economic investment and growth.
There are a number of reasons this could be going on. A changed corporate culture the rise of inequality or changes to regulations, tax policy, and union power. It's probably an intertwined story of all three.
This tale of the capitalist class scuttling real productive creation to give itself a big payday is hardly new. But that doesn't make it any less creepy when you see a piece of the social fabric dissolve into the ether of the stock market.