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Kraft Foods to merge with Buffett-backed H.J. Heinz in $40 bln deal

Kraft Foods Group (NASDAQ:KRFT) surged in premarket trades as the maker of Velveeta cheese agreed to merge with ketchup maker H.J. Heinz in a deal likely to surpass the $40 billion. Shares of the Northfield, Illinois-based company were trading up 35 percent at 8:31 a.m. in New York. The stock closed yesterday at $61.33, down 1.3 percent.

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Kraft Foods Group (NASDAQ:KRFT) surged in premarket trades as the maker of Velveeta cheese agreed to merge with ketchup maker H.J. Heinz in a deal likely to surpass $40 billion.

Shares of the Northfield, Illinois-based company were trading up 35 percent at 8:31 a.m. in New York. The stock closed yesterday at $61.33, down 1.3 percent.

The new company will be known as Kraft Heinz Co, headquartered in Pittsburgh and the Chicago area, and led by Heinz chief executive officer Bernardo Hees. It will become the third-largest food and beverage company in the U.S.

Current Heinz shareholders will own 51 percent of the combined company with Kraft shareholders owning a 49 percent stake.

The new company will have revenue of about $28 billion, the companies said in a statement today. It will have eight brands worth more than $1 billion each and five worth $500 million-$1 billion each, the companies said.

The deal was engineered by Heinz's owners, the Brazilian private equity firm 3G Capital, and billionaire investor Warren Buffett's Berkshire Hathaway (NYSE:BRK.A).

“This is my kind of transaction, uniting two world-class organizations and delivering shareholder value,” Buffett said in the statement. “I’m excited by the opportunities for what this new combined organization will achieve.”

Berkshire has been a longtime investor in Kraft, tracing back to a stake in its predecessor company, part of Buffett’s investments in well-known consumer businesses.

Kraft shareholders will receive stock in the combined company and a special cash dividend of $16.50 per share as part of the deal, representing 27 percent of Kraft’s closing price yesterday.

Berkshire and 3G will provide the $10 billion to fund the special dividend.

Kraft today is a mostly U.S. food conglomerate whose brands include Oscar Mayer deli meats and Kool-Aid in addition to its namesake cheese products. The company has struggled of late, buffeted by changes in consumer tastes and other factors that have challenged many of the biggest and most established packaged-food companies.

Kraft’s revenue last year was effectively flat at $18 billion, while net profit fell 62 percent to $1 billion, in part because of higher commodity costs and big charges related to post-employment benefit plans. The company has said it lost market share in 40 percent of its U.S. businesses and was flat in the rest.

Today’s Kraft was born in a huge corporate split in 2012, when it was spun off by its namesake, leaving an international snacks company now called Mondelez International Inc.

3G and Berkshire bought Heinz for $23 billion and took the company private in 2013 in the largest ever deal in the food industry.

Kraft is 3G Capital's fifth major deal in the food and beverage industry since 2008, when it engineered a takeover of Anheuser-Busch by brewer InBev.

3G Capital also controls Restaurant Brands International Inc, formed when its Burger King business bought Canadian coffee chain Tim Hortons Inc.

Alex Behring, Heinz's chairman and 3G Capital managing partner, will become chairman of the combined company and Kraft Chief Executive John Cahill will be vice chairman.

The deal is expected to close in the second half of this year.

Quick facts: Kraft Heinz Co

Price: 29.74 USD

NASDAQ:KHC
Market: NASDAQ
Market Cap: $36.36 billion
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