3G Capital Planning To Acquire Kraft for $40 Billion

A possible new partnership may cause a significant shake-up of the US food industry as 3G Capital Partners LP is currently discussing the acquisition of Kraft Foods Group.

Both the Wall Street Journal and the Financial Times reported that 3G Capital Planning, the Brazilian private equity firm, is in advanced talks to buy Kraft. As 3G is already the owner of Heinz, such an acquisition might allow the private equity firm to create a food giant by combining Kraft and Heinz.

Burger King Worldwide Inc. is a part of 3G’s portfolio since 2010 when the acquisition took place. Back in 2013, 3G acquired H.J. Heinz in a $23 billion deal after teaming up with Warren Buffett’s Berkshire Hathaway. Yet the private equity firm didn’t stop there. Last year, Tim Hortons Inc., Canada’s well known coffee and doughnut retailer was also acquired by 3G in an $11 billion deal financed in part by Warren Buffett.

The news of this possible acquisition came only after the markets had closed on Tuesday, when Kraft finished the trading day at $61.33. Yet aftermarket trading soared after the news broke and Kraft shares jumped a massive 15%.
The aggressive acquisitive Brazilian firm has made it a habit of buying “bloated” firms and then slashing costs. 3G has been on the look-out for acquisition targets. Kraft as well as other US packaged food giants seem like the perfect bet, especially since the significant changes in consumer tastes have caused sales to drop.

Before the news broke out, Kraft had a rough market value of $37 billion. Yet the normal premiums that are paid in such acquisition deals may bring Kraft’s price well over the $40 billion mark. Talks are still ongoing and while sources haven’t revealed the price that the two sides are negotiating, the acquisition could still represent a massive chunk of 3G’s capital. Yet the Brazilian private equity firm has proven again and again that it is able of gathering up the resources it requires, especially since its partnership with Mr. Buffett.

Kraft’s brands include Oscar Mayer deli meats, its namesake cheese products as well as Maxwell House coffee. Yet the company has been struggling, as have many other packaged-food companies. In 2014, Kraft experienced a 62% net profit decrease, in part because of higher commodity costs. In December, Tony Vernon, former Kraft CEO was replaced by John Cahill.

3G is the proud enforcer of what they call “zero-cost budgeting”. Basically, each company division is required to justify their costs yearly. This approach had Heinz eliminate over 1,000 jobs after the 2013 acquisition. Yet even 3G can’t base its growth on cost reductions alone, and acquiring Kraft may represent the break they need. Granted, taking on Kraft would represent a massive operational challenge, but 3G seems up for the job.