Barely had the news of 3G Capital’s interest in Kraft Foods settled in on Wednesday before the deal was suddenly confirmed and the newly acquired business would merge with Heinz. Both are household names in the US, and Heinz has a significant international presence. Ten years ago, a merger between the two giants would have been unthinkable, as their positions in America seemed unassailable.
The changing tastes of the American consumer and the recent turmoil in the global economy, though, have put the companies in a position where they’re forced to take such a dramatic risk. The sheer size of the merger – it’s currently priced at US$40bn, but that number will almost certainly rise – means that, if unsuccessful, it could become one of the most expensive flops in history. So why are the two American giants willing to take it on?
The size of the combined company means the potential for cost savings in logistics, marketing, R&D and other areas are also huge. The new company will hope to be able to recreate the kind of success Dixons Carphone has enjoyed so far, following the merger of two complimentary businesses to take advantage of new trends in retail, such as increased online shopping. Cost-cutting is all well and good, but to survive and grow the new company must gain traction with America’s fickle consumers. By merging, the two companies believe that they can regain their previously dominant positions in their domestic market.
The food preferences of any population are always subject to change, with habits affected by increased global mobility and easy access to cheap travel making the world a smaller place. America has seen a surge in the popularity of Mexican food recently, reflecting the growing impact of Latin-American culture in the US. And yet, interestingly, here we have a Brazilian buyout fund investing in a firmly US business. The partnership between 3G Capital and investor Warren Buffett itself nicely represents the union of old-school America and Latin innovation. 3G has, of course, already bought American fast food giant Burger King, and cut costs by merging the company with Tim Hortons. Kraft and Heinz specialise in staples of the American diet of ten years ago – macaroni cheese, tomato ketchup and the like – but they need to continue to reinvent their offerings if they’re going to stay relevant. That innovation could come through further M&A – see General Mill’s purchase of Annie’s Homegrown.
Heinz has the international network that Kraft could use to take its products out of their traditional market. Though while it’s been suggested that Kraft could look to expand internationally, the relatively recent spin-off of Mondelez suggests this would be a very complicated path to take. As with the Mondelez move, 3G’s investment has been a boon for shareholders, so it’s little surprise that Warren Buffett is so pleased.
I’m intrigued to see how the new company will perform, and I’m convinced that, if the two parties can combine their expertise to innovate both of their core offerings, the merger will be a huge success. What do you think the outlook for the new company is? Let me know at moira@thembsgroup.co.uk, and have a lovely weekend.