Heinz merging with Kraft in mega-deal; headquarters to stay in Pittsburgh

H.J. Heinz Co. and Kraft Foods Group Inc. are bringing together some of the most iconic food brands in American kitchens in a merger that would result in the world's fifth-largest food and beverage company.

The combination of two high-profile names highlights the pressures food companies are facing to overcome a stagnant U.S. market that is increasingly turning away from packaged products. The companies said the deal will give them leverage in key markets because of their scale and will allow Kraft to expand globally.

The latest play by Warren Buffett to beef up his food industry holdings would establish a company with $28 billion in annual revenue and an expected market value of $100 billion.

Heinz is the maker of its namesake ketchup and other condiments, Ore-Ida potatoes and Classico pasta sauces. Kraft products, which can be found in 98 percent of American cupboards and fridges, include Kraft macaroni and cheese, Oscar Mayer hot dogs and Philadelphia cream cheese.

Buffett's Berkshire Hathaway joined with Brazilian investment firm 3G Capital to take Heinz private in 2013. That deal had raised concerns that Pittsburgh, where the storied ketchup maker is based, would lose its historic ties with the company and its philanthropic generosity.

Executives at Kraft and Heinz moved Wednesday to reassure residents of Pittsburgh and Kraft's home base in the Chicago-area that the tie-up won't dissolve their connections to those communities. The merged company, the Kraft Heinz Co., will maintain dual headquarters.

“We're keeping our roots of the Heinz business in Pittsburgh,” Heinz CEO Bernardo Hees told reporters on a conference call. “For the community of Pittsburgh, it's actually very exciting news.”

Executives also said there are no plans to rename Heinz Field with the name that the merged company will take. Heinz has six years remaining on a $57 million, 20-year contract it signed with the Pittsburgh Steelers in 2001 for the right to name the team's stadium.

The deal also won't mean noticeable changes for consumers and their favorite brands. Executives said they planned to look for ways to cut costs and improve efficiencies at the merged company, a hallmark of Hees and 3G Capital.

Hees, who is slated to become CEO of Kraft Heinz, said the company will use Heinz's broad international footprint to expand sales of Kraft products. Kraft's markets are primarily in the U.S. and Canada, where food companies have struggled to find growth.

“We get bigger scale in North America, (and) we can now distribute through our channels internationally the Kraft brands,” Hees said. “So it fits extremely well.”

Heinz has focused on expanding its presence overseas, particularly in emerging markets such as India, Brazil and China. U.S. growth has become difficult because the market is saturated; consumers are looking for fresh and organic fare, and eschewing heavily processed food.

Erin Lash, a Morningstar Inc. analyst in Chicago, said Kraft will benefit from Heinz's “vast global distribution platform, which derives 60 percent of sales outside North America.”

But before expanding Kraft sales, Hees and 3G will look to slash costs, which they have done in previous deals, including at Heinz; fast-food chain Burger King, which 3G acquired in 2010; and at Anheuser-Busch, which 3G merged with InBev in 2008.

They expect to produce $1.5 billion in cost reductions by 2017 in the merged companies. Hees said it was too early to provide details as to where it would eliminate redundancies in operations or where jobs would be cut.

In the last two years, 3G has cut 7,400 jobs at Heinz, closed five of the ketchup-maker's manufacturing plants and produced savings of about $250 million a year. It employs about 800 workers in Pittsburgh, down from about 1,200 before the deal.

Kraft, which has sales of $18 billion a year, employs 22,000 people in North America.

Brian Yarbrough, an analyst with Edward Jones in St. Louis, said 3G's track record of wringing efficiencies out of companies to grow profits “is nothing short of outstanding.” But he said its history of increasing revenue has not been as stellar.

“That's going to be the million-dollar question,” he said. “Longer term, can these two companies combined grow revenue and not just profits?”

Under 3G, Heinz reported sales of $10.9 billion last year, down 4 percent from the previous year, but its profits ballooned to $657.1 million from $18 million the year before because of layoffs, plant closings and other expense reductions.

The merger occurs as well-established food producers struggle to keep up with shifting appetites. But Buffett said both companies have a strong base and powerful brand recognition.

“I think the tastes Kraft and Heinz appeal to are pretty enduring,” Buffett said in a telephone call to the business news channel CNBC.

Pittsburgh Mayor Bill Peduto said he was “very pleased” that the deal “expressly includes a continued commitment to Pittsburgh.”

While it may not make sense to maintain two headquarters, Hees said the combined company's size and many brands allow for separate operations.

“We are very comfortable with this,” he said, noting that he will be regularly commuting between Pittsburgh and Chicago.

But Yarbrough said he expects the company to eventually be run out of Heinz's headquarters. “They may keep two, but they will definitely shrink if they don't merge into one,” he said.

The deal materialized rapidly, Buffett said, having been in the works for only about four weeks.

There are plans for at least four new products this year, Buffett said, and that there is a lot of freedom to sell the company's products outside of the U.S. and Canada.

Since splitting from Mondelez International Inc. in 2012, Kraft's business has been primarily concentrated in the U.S. and Canada, where all of its manufacturing capacity is located.

Kraft Heinz will be 51 percent owned by Berkshire Hathaway and 3G Capital, with Kraft shareholders owning a 49 percent stake. Kraft Heinz will be publicly traded, with each Kraft shareholder receiving one share of the combined company for each Kraft share. Heinz also will pay Kraft shareholders a special cash dividend of $10 billion, or $16.50 per share.

The deal, which still requires approval from regulators and Kraft shareholders, is expected to close in the second half of this year.

The Kraft Heinz board will include six directors from the current Heinz board. The current Kraft board will appoint five directors to the combined company's board.

Kraft Heinz plans to keep Kraft's current dividend per share once the transaction closes. Kraft has no plans to change its dividend before the deal is complete.

Alex Nixon is a staff writer for Trib Total Media. Contact him at 412-320-7928 or anixon@tribweb.com. The Associated Press contributed.