Earlier today, H.J. Heinz Co. announced it would buy Kraft Foods, merging two of the largest food and beverage providers in North America.
The buyout amount wasn’t publicized, but what is known is that Warren Buffett’s Berkshire Hathaway and investment firm 3G Capital are behind the merger.
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What does the deal mean for investors? One advisor says Heinz, which ceased listing on the NYSE in June 2013, might once again become publicly traded.
“This is great news for both the current Kraft shareholders and the former shareholders of Heinz,” says Steve Barban, principal, senior financial advisor, Gentry Capital, Manulife Securities Inc. Since Kraft is public, Heinz may follow suit. “The share price of the combined entity would be on an upward trajectory, given their strong brands.”
And as with most mergers, Barban notes there’ll likely be “a fair bit of consolidation,” which could affect employees. “3G Capital is a financial engineering company, where they buy a company, slash costs to the bone, drive up net earnings [and] thereby drive up the share price. They eventually sell off the new slimmed-down company at a much higher multiple, based on the new valuation.”
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After this process, “sales have to rise because you can only cut costs to a certain point.” Barban points to 3G Capital’s acquisition of brewing company Anheuser-Busch as an example of the financial engineering process. Shortly after the acquisition, 3G Capital cut 1,400 jobs, and brought in new executives. The company’s stock price has steadily risen and closed yesterday at $122.34.
Yet, adding Buffett to the Heinz-Kraft mix could alter what 3G’s done in the past, notes Barban, since the billionaire is known for his buy-and-hold strategy. “They bought Heinz together initially, and Burger King-Tim Hortons. Perhaps a bit of ‘Buffettology’ will rub off on 3G Capital, and they will hold longer than the norm.”
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What this means for investors
Here are Barban’s tips for investors.
1. If you own Kraft shares, sit tight so you’ll receive your dividend when the deal is completed in the second half of 2015. Hold the shares of the new entity, if applicable. Those shares will be a core holding going forward since the new company won’t have an inordinate amount of debt.
2. If you don’t currently own Kraft shares, consider buying if shares of the combined entity become available, but only if it meets your risk profile.
“Also, investors should look at other food companies with established, dominant and growing brands, like J.M. Smucker and Mondelez,” he says. “They could be future targets if the consolidation trend continues in this industry.”