H.J. Heinz and Kraft Foods Group Inc. recently announced a proposed merger between the two food giants. The proposed deal is valued at approximately $45 billion, and is backed by 3G Capital and Warren Buffett’s Berkshire Hathaway. If consummated, the newly formed Kraft Heinz Company would be the fifth-largest food company in the world and the third-largest in the U.S. Under the terms of the deal the current shareholders of Heinz will hold a 51% stake in the newly formed company. These shareholders include 3G and Berkshire Hathaway. The remaining 49% will go to current Kraft shareholders. To make the deal more palatable for Kraft shareholders, those shareholders will be provided a one-time cash dividend of $16.50 per share. The proposed dividend will cost nearly $10 billion (borne by 3G and Berkshire Hathaway), and will be paid out as soon as the deal is finalized.
Even though the deal has been announced and is backed by Mr. Buffett and his Berkshire Hathaway juggernaut, it remains to be seen whether the FTC will take issue with the merger or whether Kraft shareholders will vote to approve the deal. At least one of those questions has been at least tentatively answered when a Kraft shareholder, Steven E. Leitz, filed suit to stop the proposed merger. The shareholder lawsuit aside, the question remains whether the proposed merger between Heinz and Kraft will face the same fate as the now embroiled Sysco-US Foods merger.
According to at least some in the world of mergers and acquisitions, the Heinz-Kraft deal is unlikely to face the same scrutiny as the Sysco-US Foods deal. According to Diana L. Moss, president of the American Antitrust Institute, a Washington, D.C., non profit that advocates for competitive policies that protect consumers, “Kraft and Heinz is a whole different ballgame. You’re not eliminating a head-to-head competitor across the board.” It is that head-to-head issue that is now tripping up the proposed merger between Sysco and US Foods. However, the same is not true of the Heinz-Kraft deal. Heinz and Kraft control a lot of different brands but not always in the same categories. For example, Heinz doesn’t sell coffee and Kraft doesn’t sell Ketchup. Ms. Moss said if one company in a merger has too much control in a single category and can raise prices unchecked, antitrust regulators will work to remedy the situation. At a glance, she assumed there might be some issues in the Heinz- Kraft merger in the snack category or maybe in sauces and condiments. “It may be the case that they have to spin off some sauce products,” she suggested. Even if required to divest some of their assets, the fact that the proposed merger doesn’t wholly eliminate one of the two competitors likely signals clear sailing for the proposed merger.
The Heinz-Kraft merger and other proposed food mergers have increasingly come under the FTC’s watch, and have suffered from the FTC’s narrow view on food mergers. In examining past food mergers, the antitrust regulator has used categories as specific as “super intense” mints and premium ice cream, which can make it appear that some products have few competitors, Jennifer Rie, an analyst at Bloomberg Intelligence, wrote today in a note. “They look at food cases very narrowly, and these companies have a lot of brands,” Rie said in a phone interview. “If they define the markets narrowly, there might be overlap.” Thus, whether the Heinz-Kraft deal ultimately passes muster will depend largely on how the FTC defines the relevant markets in this case.
Image Credit: CNN