Kraft Heinz Merger Mohd Sakib Agenda n Overview of Merger Companies n Deal Terms and Merger Structure n Synergies and Risks n Effects on Investors – 3G Capital and Berkshire Hathaway n Future of Kraft Heinz 4/22/15 Wall Street Club 2 Overview of Kraft n Kraft Foods Group, Inc. is a consumer packaged food and beverage company founded in 1903 – Operates in six segments; portfolio of >70 major brands – Primarily serves supermarket chains, club stores, retail food outlets, etc n Kraft split into Kraft Foods, focusing on grocery products in North America, and Mondelez International Inc., focused on snacks – Stable financial performance – $18 Billion in annual sales – 9 brands with more than $500 Million in annual sales 4/22/15 Wall Street Club 3 Overview of Heinz n H.J. Heinz Company is a global food player that was established in 1869 – Three core categories: Ketchup and Sauces, Meals and Snacks, and Infant/Nutrition – Products have #1 or #2 market share in 50+ countries n Acquired by Warren Buffett and 3G Capital for $28 Billion in 2013 – Appealing due to strong, durable brands and global presence – Strong international presence with emerging market sales consisting of 25% of total revenue 4/22/15 Wall Street Club 4 Deal Terms and Merger Structure n Stock for stock merger possibly valued at $46.6 Billion and orchestrated by Berkshire Hathaway and 3G Capital – Heinz will control 51% whereas Kraft will own remaining 49% n $10 Billion special cash dividend to be paid out by 3G and Berkshire – Kraft shareholders will receive $16.50 a share, representing 27% premium of Kraft’s closing price on Tuesday – Valuation is contested as Heinz is private n Combined company’s share will trade publicly on NASDAQ but 3G and Berkshire will not dilute their stake – Berkshire will own 320 Million shares (value of $9.5 Billion) 4/22/15 Wall Street Club 5 Deal Terms and Merger Structure n Refinancing $9.5 Billion of existing Heinz High-Yield debt with investment grade debt – focus on long-term – Target of $2 Billion debt pay-down in 2 years n Biggest merger of the year advised by only two investment banks – Lazard adviser for Heinz, and Centerview Partners advised Kraft n Changes in corporate governance due to merger – Alex Behring (chairman of Heinz and Managing Partner at 3G Capital) will be the new chairman of Kraft Heinz – Bernardo Hees (CEO of Heinz) will be the new CEO – John Cahill (Kraft chairman and CEO) will step down to be vice chairman n Kraft Heinz will be co-headquartered in Pittsburgh and Chicago – Implementation of “zero-based budgeting” for COGS savings – Rationalized manufacturing footprint 4/22/15 Wall Street Club 6 Synergies and Risks n 3rd largest food and beverage company in North America, and 5th largest food and beverage company in the world – Kraft Heinz will have combined revenue of about $28 Billion – 8 +$1 Billion brands and 5 brands valued at $500 Million – $1 Billion 4/22/15 Wall Street Club 7 Synergies and Risks n Entering into new markets – “Nestlé of America” – Kraft brands primarily situated in North America – in 98% of households – Heinz’s foreign sales account for >60% total revenue – global presence n Goal of generating $1.5 Billion in annual cost savings by end of 2017 – Estimations that Kraft Heinz will earn $8 Billion in annual EBITDA – Will bolster Kraft after its gross profit decreased by 17% in 2014 – Would possibly increase Kraft Heinz’s enterprise value to $100 Billion n Addressing changes in consumer tastes and desires – Affluent customers increasingly buy healthy, organic products, while low- income customers buy non-name brands n Deep portfolio diversification with broader range of products – Win additional shelf space increasing scale – critical – Similar ingredients – supply chain synergies 4/22/15 Wall Street Club 8 Effects on Investors – 3G Capital n Brazilian private equity firm run by billionaire financier Jorge Lemann – String of recent successes in long-term consumer food investments – Doesn’t always have a traditional LBO and PE approach $52 Billion Merger of InBev with Anheuser-Busch (2008) Largest LBO for a fast-food chain – $4 Billion LBO of Burger King (2010) Partnership with Warren Buffet to buy H.J. Heinz for $28 Billion (2013) Burger King merger with Tim Hortons for $11.4 Billion to create Restaurant Brands Internaonal (tax-inversion deal) (2014) n Historically known for aggressively cutting costs as an operator – After Heinz acquisition, 3G cut 7,000 jobs, closed 6 factories, consolidated headquarters, etc – Made Heinz the most profitable food company in the industry ($1 Billion in operating movements) – will follow suit 4/22/15 Wall Street Club 9 Effects on Investors – Berkshire n Berkshire Hathaway is an American multinational conglomerate holding company that manages subsidiary companies – Traditionally focused on life insurance, consumer retail, utility companies – Historically took large positions; now buying whole companies n Warren Buffet’s investment philosophy follows value investing – Looks at long standing, stable, iconic brand name companies (Coca-Cola, Heinz, Geico, P&G, etc) – Places strong emphasis on adept management and care for shareholders n Initially invested $4.25 Billion equity in previous Heinz deal, and $5.2 Billion for special $10 Billion dividend – invested “forever” n Solid partnership with 3G Capital; acts as the capital provider and 3G Capital acts as the hands-on operator – 3G Capital provided more equity and committed in the long-run 4/22/15 Wall Street Club 10 Future of Kraft Heinz n Anti-trust regulations – unlikely to block deal due to full array of products that complement each other – Must overlap certain products that are similar – Deal expected to close in second half of 2015 n Significant cost-cutting; estimated to cut 5,000 jobs at a minimum – Cost cuts trickle down to consumers for lower priced products? – Future plans on changing product lines according to changing tastes n Potential to go public as Burger King did in 2012 – Would return-focused approach stray away from long-term vision? n Future Berkshire Hathaway and 3G Capital partnerships? – Other companies are vigilant – General Mills, PepsiCo, etc 4/22/15 Wall Street Club 11 Questions? .