Kraft Foods (KRFT, Financial) stock price is surging today after 3G Capital Partners LP and Berkshire Hathaway agreed to acquire the company. Below is the relevant excerpt from Bloomberg:
3G Capital Partners LP is in advanced talks to buy Kraft Foods Group Inc. through its H.J. Heinz Co. unit, according to people familiar with the matter, in a combination of two iconic brands that would intensify the private-equity firm’s shake-up of the U.S. food industry.3G Capital, the private-equity firm founded by Brazilian billionaire Jorge Paulo Lemann, agreed to acquire Kraft Foods Group Inc. in partnership with Warren Buffett’s Berkshire Hathaway Inc. and merge it with H.J. Heinz.
Kraft shareholders will receive 49 percent of the stock in the combined company, plus a special cash dividend of $16.50 a share, the companies said in a statement Wednesday. Berkshire and 3G will invest another $10 billion in the combined company, which will be known as Kraft Heinz Co., headquartered in Pittsburgh and the Chicago area, and led by Heinz Chief Executive Officer Bernardo Hees.
The deal will create the world’s fifth-largest food company with revenue of about $28 billion and could presage more consolidation in the lagging U.S. food industry. Kraft’s brands will benefit from Heinz’s presence outside the U.S., while opportunities exist to trim $1.5 billion in annual costs by the end of 2017, the companies said.
3G capital has earlier been active in consumer space. Two years ago it teamed up with Warren Buffett (Trades, Portfolio)'s to acquire H.J. Heinz Co for $23.2 billion.
Kraft Foods is one of the largest consumer packaged food and beverage companies in North America and worldwide. Kraft Food manufactures food and beverage products, including cheese, meats, refreshment beverages, coffee, packaged dinners, refrigerated meals, snack nuts, dressings, and other grocery products, primarily in the United States and Canada. Its product categories span breakfast, lunch, and dinner. Kraft Foods reports its results through six reportable segments: Cheese, Refrigerated Meals, Beverages, Meals & Desserts, Enhancers & Snack Nuts, and Meat.
Kraft recently reported a good fourth quarter with its Q4 organic revenue growth of 3.40% outpacing North America food and beverage industry growth of 2.40%. Volume mix contributed 1.5 percentage points to growth while pricing was up nearly 2%. The company's aggressive pricing action in light of commodity price increases were largely accepted by consumers. Kraft also continues to do well in terms of innovations. Its new products Oscar Mayer P3, McCafe coffee and the rejuvenation of its Philadelphia soft cream cheese lines were all well received by the customers.
Going forward, the company continues to work on building a robust product pipeline of quality products to meet evolving consumer preferences. The company has recently announced leadership changes where it has promoted two of its key managers — George Zoghbi and Chris Kempczinski — to new positions where they will partner with the rest of its leadership to develop plans that target innovation and brand rejuvenation built on clear priorities. This change will help the company accelerate pace of innovation.
In addition to the company specific initiatives, I believe several macro tailwinds will also help Kraft in 2015. First, Kraft's commodity basket (cost of raw materials) is trending down, which will help the company's margins going forward. Second, recent correction in crude oil prices is easing financial pressure on consumers leaving them with more to spend. Consumer food companies like Kraft are set to benefit from this increased spending. And finally, Kraft is primarily a North American company. While its peers with significant foreign exposure are likely to see headwinds from stronger US dollar, Kraft will not face any such problem. In fact, of late fund managers are seen preferring the companies which derives most of their revenues from the US.
Kraft Foods is trading at ~23 times Forward EPS. According to sell side estimates, the company’s EPS is expected to grow 3.12% in the current fiscal year and 7% next fiscal year. The company has a dividend yield of 3.40%. Out of 16 analysts covering the company, five are positive and have buy recommendations, six have hold ratings and one has a sell rating. The company has good growth prospects and cost cutting potential going forward.
