The Kraft Heinz Group

Anjal Agrawal

M&A and Strategy at Virtusa || Ex-IB at Nomura (PPO) || IIM Shillong (17-19) || CA || Yes Bank FutureReady Scholar || Ex-JPM || Ex-DHC || #ProudSINKWAD

Published Aug 19, 2023

In 2017, Kraft Heinz launched a $143bn hostile bid for Unilever, and what could have been the second largest takeover in history and biggest ever acquisition of a UK-based company, unfortunately, didn’t materialise. Kraft Heinz was just over $100bn in market value at the time.

According to latest data, The Kraft Heinz Company recorded net sales of ~$26bn in 2022, across a portfolio of six consumer-driven product platforms with eight $1bn+ brands. Kraft Heinz operates 79 manufacturing and processing facilities, ~5,550 ingredient and packaging suppliers, ~210 external manufacturers, and ~36,000 employees across 40+ countries. But Kraft Heinz is just over $40bn in market value now, which indicates a 60% drop in market value since 2017.

But the Unilever Kraft connection goes long back till 1988. Between 1988, till today, Kraft (or Kraft Heinz as we know it today), the fifth-largest food and beverage company globally, has come a long way as a result of decades of takeovers in a growth strategy that showed no signs of slowing down.

Philip Morris, the tobacco giant, acquired Kraft

Kraft traces its history to three successful food entrepreneurs — J.L. Kraft, who started his cheese business in 1903; C.W. Post, who founded Postum Cereal Company (later renamed General Foods Corporation) in 1895; and Oscar Mayer, who began his meat business in 1883

In 1988, in one of the biggest takeovers at the time involving two of best-known makers of consumer goods globally, Philip Morris acquired Kraft in a deal valued at $13.1bn in cash from National Dairy Products corporation (who had bought Kraft in 1930).

But why would a tobacco giant buy a mac and cheese company? At the time, Philip Morris was the maker of not only Marlboro cigarettes, but also Miller beer (now part of AB InBev); Maxwell House coffee and Ronzoni spaghetti (now part of Kraft Heinz). So, Philip Morris was a conglomerate of consumer brands, and the combined company with Kraft was about to knock the world's largest producer of consumer goods out of its first place – Unilever.

And with this Philip Morris alliance, what Kraft saw was tremendous growth, acquisition and spin-off of globally-known brands, ownership exchanging hands and undeniable brand leadership.

1989: Under the Philip Morris ownership, Kraft was merged with Philip Morris’s other food unit, General Foods Corp. to form Kraft General Foods. With this merger, Kraft added numerous packaged foods to its portfolio namely Oscar Mayer meats, Maxwell House coffee, Jell-O gelatin, Kool-Aid and Tang powdered beverage mixes amongst others.

2000: Philip Morris acquired Nabisco at $19.2bn. Well, if you were wondering why haven’t I mentioned the all-favourite Oreos yet, here it is. Nabisco was the company which originally introduced Oreos in 1912. With this acquisition, Philip Morris added Oreo cookies and Ritz crackers to its portfolio of consumer brands, which were eventually integrated in the Kraft family. For Federal Trade Commission to approve this transaction, Nabisco's dry-mix gelatin, dry-mix pudding, no-bake dessert, and baking powder brands were sold to The Jel Sert Company (US-based private holding company of F&B brands); and intense mints brands to Hershey Foods.

Kraft Foods raised $8.7bn in the 2nd largest US IPO at the time; Philip Morris sold 16% stake

In 2001, Kraft became the largest publicly traded food stock in US and second only to Switzerland's Nestle globally, with a valuation of more than $50bn. Kraft had No. 1 positions in several food categories, and owned powerhouse brands including Oreo cookies, Jell-O gelatin, Maxwell House coffee, Philadelphia cream cheese, DiGiorno pizza, Post cereals and Kool-Aid. The funds from IPO helped retire some debt, which was taken to fund the cash purchase of Nabisco in 2000.

Philip Morris (became Altria Group in 2003) spun-off Kraft; ownership comes to an end

In 2007, 89% of Kraft's stake owned by Altria was distributed to Altria shareholders. The separation was expected to enhance Kraft's ability to make acquisitions, allow management to focus effectively, provide greater debt capacity to Kraft; and improve capital allocation within each company.

Warren buffet acquired 8% stake in Kraft, making Berkshire the largest single shareholder in 2008

As fate would have it, Kraft was once again in the hands of an owner with the experience of growing brands globally. Buffett's move to buy small stakes in Kraft and GlaxoSmithKline in 2008 was in line with his strategy of buying brand names with significant market power; other examples of which could be seen in his stakes in Coca-Cola, Procter & Gamble at the time.

2009: Kraft offered $16bn to buy Cadbury – got rejected. Other major bidders included Nestle and Hershey’s. To distract other bidders, Kraft sold its frozen pizza business to Nestle for $3.7bn, and Nestle officially confirmed that they will not bid for Cadbury (one down, one to go). Undeniably so, Cadbury’s board publicly credited Hershey’s as the preferred buyer. Kraft launched a hostile takeover – but was shot down by Cadbury’s board. Eventually, after a lengthy fight, Kraft acquired Cadbury for a whopping $19bn (increasing $3bn from the original offer). Kraft became a "global confectionery leader", dethroning Mars from their position.

Trian Fund Management (investor in Kraft from 2007 till 2012) is a highly engaged shareowner that invests in high quality but undervalued and underperforming public companies and works collaboratively with management teams and boards to create value for all shareholders.

Trian believed the size and complexity of Kraft post-2010 was difficult to manage, and the solution was to create two distinct public companies: a unique global snacks business with strong prospects for growth and emerging markets exposure, and a slower growth North American-centric grocery business with leading brands and free cash flow generation. Trian presented its white paper to management, outlining its investment thesis and operational and strategic initiatives for the company.

2012: Kraft decides to split in two, spinning off its mature North American grocery business to highlight its global snack-food business. The larger global business – which includes Oreo, Cadbury, Wheat Thins, and other brands – is named Mondelez International. The smaller company, will be called Kraft Foods Group – gets the Kraft cheese products, Maxwell House coffee, Jell-O, and Planters nuts, among other brands.

Fun fact: After successfully orchestrating the spin-off, Trian Fund Management bought a stake in PepsiCo in 2013, and tried merging Mondelez with PepsiCo.

3G capital and Berkshire Hathaway acquired Heinz for $28bn in 2013

Fun fact: Trian was also a shareholder in Heinz from 2006 till 2013.

Heinz is known for its “57 Varieties” slogan, which was devised in 1896. Funny story – Heinz has been linked to the number 57 for more than a century. It was a key part of its early strategy to attract consumers. It still features on Heinz ketchup bottles today and is central to the brand’s identity. But that famous number is completely made up. There weren’t 57 Heinz varieties in 1896. Nor when Heinz 57 sauce was introduced soon after. There aren’t 57 now. There are, in fact, hundreds of Heinz varieties.

Visiting New York City in 1896, Henry Heinz, the Founder of Heinz, spotted an advertisement for “21 styles” of shoes. He found it memorable and thought attaching a number to his own brand would help it stick with consumers. Ashleigh Gibson, Heinz’s brand director, said in an email that the company’s founder felt there was something “mystical, magical, and memorable” about the number 57, which was a combination of five, Henry Heinz’s lucky number, and seven, his wife’s lucky number.

Heinz Tomato Ketchup was among the company’s first products, and it is now Heinz’s most iconic and eponymous brand, claiming > 50% of the market share for ketchup in the US. Introduced by the company in 1876, spelled as “catsup”, which was soon changed to “ketchup” to distinguish the product — among some 60 food items. Pickles were Heinz’s biggest success at the time, and Henry Heinz became known as the “pickle king.”

During the Great Depression in the 1930s, Heinz became a top-seller in ready-to-eat meals and baby food under the leadership of Howard Heinz, Henry Heinz's son. Over the next few decades, Heinz continued to grow with brands in sauces, soups, beans, pasta and infant foods, Ore-Ida potato products, Weight Watchers Smart Ones entrées, T.G.I. Friday's snacks, and Plasmon infant nutrition products, until the new investors came knocking.

(We will discuss on the take-private of the Heinz group in a separate case study in detail – but for this article, I have tried to summarise the takeover, just enough to understand the dynamics of the Kraft-Heinz merger)

In Feb-13, Berkshire Hathaway and 3G agreed to buy Heinz and take it private. Berkshire Hathaway and 3G will equally own the company post the transaction.
Shareholders were offered $72.50 per share in cash, in a transaction valued at $28bn, including $5bn of Heinz's outstanding debt. The offer price is a 20% premium to last closing stock price of $60.48 per share.
The Heinz deal ranked below the $61.6bn spinoff of Kraft Foods from Altria Group in 2007; and the $60.4bn buyout of Anheuser-Busch by InBev in 2008.
The deal was approved by Heinz's board and 95% of the company's shareholders.
The deal was lucrative for shareholders as it valued Heinz at 12x expected EBITDA in next fiscal period, in line with other buyouts in the packaged goods business and a 30% premium over equity research house, Morningstar's $56 a share fair value target price.

3G’s strategy has always been to slash expenses, improve profitability and, typically, increase revenues by acquiring other companies. Repeat. The firm’s zero-based budgeting required managers to justify every expense on an annual basis, not just build on the previous year’s budget. Profit margins were 3G Capital's specialty. 3G Capital was able to increase Budweiser's EBIT margins by 600 basis points between 2009 and 2014.

Two years subsequent to the takeover, Heinz under 3G’s ownership and guidance, was able to increase its EBITDA margins by 800 basis points; net working capital was 12% of sales, which fell to 3.5%, as Heinz increased its accounts payable days on hand and got vendors to pay for goods quicker.

$45bn merger of H.J. Heinz Co. and The Kraft Foods Group – The Kraft Heinz Company

And so – the 5th largest food company globally and the 3rd largest in US, was born.

Heinz could use Kraft's improved manufacturing efficiency to quickly increase volumes, scaling the business from under-capacity. They could also use Kraft’s brand licensing agreements that the company could retake from former affiliate, Mondelez. The deal was expected to realize $1.5bn in annual cost savings by the end of 2017, from higher economies of scale in the North American market. Some part of the cost savings was expected from the ability of the combined company to refinance Heinz’s high-yielding debt. Since Kraft had a much better credit rating, the combined entity could replace such debt with low-yielding, investment-grade debt.

As per the deal, 3G Capital and Berkshire Hathaway (shareholders of Heinz) held a 51% stake in the newly formed company; remainder 49% was held by the shareholders of Kraft’s public company. Along with the equity in the new company, Kraft’s shareholders were also entitled to a one-time cash dividend of $16.50 per share, i.e., $10bn, paid by 3G Capital and Berkshire Hathaway.

The chairman of Heinz, co-founder and managing partner at 3G Capital, Alex Behring, assumed chairmanship of the new company. The vice chairmanship was assumed by Kraft’s chairman and CEO, John Cahill. Talk about a golden parachute: He was paid $19.9m in compensation at the time of the merger. Bernardo Hees, the CEO of Heinz, retained his title for the merged entity.

One month post the merger, in Aug-15, Kraft Heinz laid off 2,500 employees (5% of global workforce), including 1/3rd of the staff, at Kraft’s headquarters in Northfield. In Nov-15, Kraft Heinz announced plans to shut down seven plants in the US and Canada, cutting 2,600 more jobs. The problems had just begun –

#1 Stock prices drop – Sales started softening, and while 3G’s cost-cutting efforts resulted in robust profit margins, the stock dropped as investors got nervous.
#2 R&D investments – 3G made its cuts when Kraft Heinz should have increased research and development to compete with the start-ups increasingly taking shelf space away from food giants. In 2014, before the merger, Kraft spent $149m on R&D. In 2017, the combined Kraft Heinz spent $93m, according to regulatory filings.
#3 Falling behind in the market – Kraft Heinz shareholders criticized the company for missing the bus on plant-based meat, which has drawn a surge of consumer interest and investment from major food companies.
#4 Write downs – $15.4bn write-down of beloved brands (acquired four years ago)
#5 Talent and Leadership – Kraft personnel, including some with decades of experience, were replaced by 3G leaders, some of whom had virtually no experience in the consumer-packaged goods industry
#6 Focus – Change in focus to cutting costs than creating products that people want to buy. Fun fact: Bernardo Hees, the new CEO, reportedly sent a memo directing Kraft Heinz employees to make sure they printed on both sides of pieces of paper.

Kraft Heinz punching above its weight – A $143bn bid for Unilever in 2017

To summarise until now, Kraft Heinz is now largely a North American grocery business housing some of the biggest brands including Kraft, Heinz, ABC, Ore-Ida, Oscar Mayer, Philadelphia, Velveeta, and Maxwell House. In 2017, Kraft Heinz was at a market value of just over $100bn and 51% owned by 3G Capital and Warren Buffet.

Over the years, Kraft has acquired some of the leading brands like General Foods Corp, Nabisco and Cadbury. The new Kraft Heinz, under 3G’s leadership and Warren Buffet’s financial strength was ready to unleash itself for something bigger, something that could again dethrone a market leader.

What came next? Kraft Heinz aspired for one of the largest-ever takeover in the corporate history ever – in a bid to acquire a company bigger than itself (and Kraft Heinz was already the 5th largest food company globally!). It aspired to become the world’s second largest consumer goods group, in a $143bn bid to acquire Unilever, whose brands include Marmite, Dove soap and Magnum ice cream (and this was UK’s third-largest listed company at the time!!).

In 2010, when Kraft took over Cadbury, Kraft backtracked on its promises to maintain Cadbury’s Somerdale factory, and instead closed the plant. In 1993, when Kraft acquired Terry's Chocolate Orange, it had broken its promises over Terry's factory in York also. Given such a history, there were doubts of large-scale job losses at both the companies. UK Prime Minister Theresa May (at the time) requested for scrutiny of the proposed merger between Unilever and Kraft Heinz. Unilever firmly rejected the deal.

Kraft Heinz CEO Bernardo Hees stepped down in 2019 to be succeeded by Miguel Patricio, ex-CMO at AB InBev. Hees had been at the forefront of 3G rolling up some of the most iconic American companies into consumer giants, previously as chief executive of Burger King Worldwide, H.J. Heinz and later Kraft Heinz. With the departure of Hees, Kraft Heinz was no longer run by a 3G partner.

In 2017, market cap of Kraft Heinz had crossed $100bn. Today, the market cap of Kraft Heinz is just over $40bn. Talk about 3G and Berkshire Hathaway's take-no-prisoners approach to restructuring that can be just as problematic as it is profitable.

3G, known for driving profits through aggressive cost cutting, has orchestrated a string of big deals rocking the food and drink industry similar to the Kraft and Heinz merger, which includes Anheuser-Busch InBev's takeover of SABMiller and Burger King merger with Tim Hortons (which saw participation from Berkshire Hathaway again!!). Until we get to those case studies, thank you for your time. Please post your feedback and comments.

Please find below all the information sources which have been instrumental to the above article, along with some additional reading materials. Gratitude to all the creators –

1. https://www.forbes.com/sites/greatspeculations/2015/03/30/analysis-of-the-kraft-heinz-merger/?sh=750bdd39c9a8

2. https://www.investopedia.com/news/history-behind-kraft-heinz-co/

3. https://in.fashionnetwork.com/news/Kraft-heinz-withdraws-as-unilever-says-no-thanks-to-143bn-bid,794874.html

4. https://www.nytimes.com/1988/10/31/business/kraft-being-sold-to-philip-morris-for-13.1-billion.html

5. https://abcnews.go.com/Business/story?id=88088&page=1

6. https://www.foodnavigator.com/Article/2001/06/13/Kraft-raises-8.7bn-from-IPO

7. https://web.archive.org/web/20170105170812/http://investor.altria.com/phoenix.zhtml?c=80855&p=irol-newsArticle&ID=956368

8. https://web.archive.org/web/20100819085253/http://www.fundinguniverse.com/company-histories/Kraft-Foods-Inc-Company-History.html

9. https://www.wsj.com/articles/BL-DLB-34227

10. https://www.ftc.gov/news-events/press-releases/2000/12/federal-trade-commission-clears-acquisition-nabisco-philip-morris

11. https://www.tampabay.com/archive/2000/06/26/philip-morris-acquires-nabisco/

12. https://www.reuters.com/article/uk-berkshire-holdings-idUKN1447572320080214