Could Foreign Companies Help Block the Kraft-Heinz Merger

Heinz has been owned by 3G Capital and Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A), which paid $28 billion for the company in 2013.

Once the deal is completed, existing Kraft shareholders will own 49% of the new firm, to be called The Kraft Heinz Company, and current Heinz shareholders will own 51%. Kraft shareholders will receive a special dividend of $16.50 in cash plus one share of the new company for each share of Kraft stock they own. According to the press release, the aggregate amount of the special dividend is approximately $10 billion and is being funded by 3G Capital and Berkshire Hathaway.

24/7 Wall St. cannot help but wonder if foreign food giants will be making insinuations to regulators who have to approve merger. On Thursday, Swiss food giant Nestle commented on the Kraft-Heinz merger in a negative light for how competitive it might be. Nestle already sees this merger as a threat, as it said in its presentation:

The competitiveness of Nestlé, specifically with regard to the dramatic change in consumer behaviour and the huge upheaval in the food industry, with the merger of Heinz and Kraft as the latest example.

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Other comments from the presentation included:

Swiss-Brazilian Jorge Paulo Lemann’s New York-based investment fund 3GCapital and Warren Buffett’s Omaha-based Berkshire Hathaway have pulverized the food industry market, particularly in America, with serial acquisitions, first in the beverages sector with the creation of the world’s largest brewery, Anheuser-Busch/InBev, then in the foodstuffs sector with the purchase of Burger King, Tim Hortons and Heinz. Heinz, which is merging with Kraft, will become the third largest food company in the US in terms of sales after PepsiCo and Nestlé, but ahead of Coca Cola, General Mills and Kellogg’s.

According to the presentation:

Both Kraft and Heinz posted subdued growth with products that were extremely attractive in the past but are not sufficiently adapted for the future. 3G’s partners are known in our industry for ruthless cost-cutting and have already proven numerous times that they are capable of reducing operating costs in particular by between 500 and 800 basis points, which has a revolutionary impact on all the other members of the industry. Nonetheless, although profitability for a company like Heinz is indeed greatly improved today, the same is not true for sales growth, which declined by 4.6% in 2014.

24/7 Wall St. has collected recent mergers and acquisitions that Nestle has conducted, dating back to 2001:

• Wyeth Nutrition acquisition, 2012
• Yinlu partnership, 2011
• Hsu Fu Chi partnership, 2011
• Kraft frozen pizza acquisition, 2010
• Gerber acquisition, 2007
• Novartis Medical Nutrition acquisition, 2006
• Dreyer’s ice cream acquisition, 2002
• Chef America acquisition, 2002
• Ralston Purina acquisition, 2001

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It is hard to know if Nestle itself would be contacting regulators, but mergers of this size are often objected to by competitors, whether that is a formal public objection or behind closed doors with regulators.

Kraft shares closed relatively flat Thursday, at $87.05 in a 52-week trading range of $53.33 to $91.32. The stock has a consensus analyst price target of $88.54.