Blog: Dean BestKraft investors unsurprisingly back Heinz merger. Now all eyes on likely cuts

Dean Best | 1 July 2015

In an announcement that would have surprised few, Kraft Foods Group said today (1 July) its shareholders had thrown their weight behind the plans to combine the business with HJ Heinz. The market's attention on where the management of the new Kraft Heinz Co. will look to make savings.

A preliminary count of the votes showed more than 98% of votes cast backed the transaction, support that represented more than 69% of all outstanding Kraft shares, the US company said.

The vote - and it was widely expected the deal, announced in March, given the thumbs-up by Kraft investors - paves the way for the merger to close after the close of the market tomorrow.

The transaction will create the third-largest food and beverage company in North America, and the fifth-largest food and beverage company in the world.

When the merger was announced, Kraft chairman and CEO John Cahill - set to be vice chairman at the enlarged business - said the scale of the combined business would give it opportunities for domestic growth (in areas such as foodservice in the US) and internationally.

However, in the short term at least, the impact of the deal is likely to be on jobs, given the track-record of the management at Heinz following the acquisition of the ketchup maker by Warren Buffett's Berkshire Hathaway and private-equity firm 3G Capital - some of whom, including CEO Bernardo Hees, who will be chief executive of the new Kraft Heinz.

Following the purchase of Heinz by 3G Capital and Berkshire Hathaway, the condiments maker focused on lowering its cost base. Earlier this month, Heinz revealed 2014 adjusted EBITDA increased by nearly 35%, reflecting higher gross margin and lower SG&A costs. This was primarily driven by efficiencies from productivity initiatives and zero-based budget cost control. However, sales were lower year-on-year as the company cut SKUs and exited less profitable businesses. Revenue totalled US$10.9bn last year, down 4.6% from $11.4bn. Sales volumes were down 5.3%.

According to the plans for the combined group announced back in March, the management of Kraft and Heinz expected to generate meaningful savings. The group projected $1.5bn in run-rate annual cost savings by 2017. To reduce cost of goods sold, Kraft Heinz Co. would follow the tried-and-tested model implemented at Heinz.

Speaking to just-food today, Michael Mullen, a spokesperson for Heinz and who is set to join Kraft Heinz Co., said: "The immediate focus for the company’s senior leadership team will be to integrate the two businesses, establish the company’s new organisational structure and deliver our business objectives for 2015, while always putting our millions of loyal consumers first.

"Although there will be changes moving forward, one commitment that will remain constant is our unwavering dedication to acting with integrity and the highest ethical standards, while never compromising quality or safety. We are committed to communicating with our employees openly, often and honestly while details are determined."

Our coverage of the deal when it was announced can be found here. It includes a handy infographic detailing the scope of the new Kraft Heinz Co., our analysis of what we are likely to see from the enlarged business and why the deal could mean M&A activity in the industry could accelerate.

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