Kraft to combine with Heinz in deal led by 3G, Buffett

(Reuters) - Ketchup maker H.J. Heinz Co, owned by 3G Capital and Warren Buffett's Berkshire Hathaway Inc, is acquiring a majority stake in Kraft Foods Group Inc to create the third-largest North American food company, executives said on Wednesday.

Shares of Kraft were up more than 38 percent near $85 in morning trading.

The deal would provide Heinz with access to Kraft brands, which it says are in 98 percent of North American households and include well-known names like Oscar Mayer and Jell-O. Heinz's international presence provides an opportunity to sell those brands overseas.

Kraft stockholders would get one share in the combined company, to be called the Kraft Heinz Co, and a special cash dividend of $16.50 for every share held.

Heinz shareholders will own 51 percent of the combined company and Kraft shareholders the rest.

Packaged-food makers such as Kraft are battling sluggish demand as consumers shift to products perceived to be healthier.

Kraft has overhauled its senior management over the past few months and has said it will develop products to meet changing consumer preferences.

However, "the board saw the 3G opportunity as more compelling," Kraft Chief Executive Officer John Cahill, who will be vice chairman of the combined company, said on a conference call.

The combined publicly traded company is expected to save about $1.5 billion in annual costs by the end of 2017. It will have eight brands worth over $1 billion each, the companies said.

Kraft Heinz will be led by Heinz CEO Bernardo Hees and have revenue of about $28 billion, about half that of market leader PepsiCo in 2014

Berkshire Hathaway will own more than 320 million shares in the combined company, which will have about 1.22 billion shares outstanding, Buffett told CNBC.

"We will be in the stock forever," he said.

Brazilian private equity firm 3G Capital and Berkshire Hathaway acquired Heinz for $23.2 billion in 2013.

The Kraft deal is unlikely to face antitrust hurdles as there is little overlap in products, analysts said.

Kraft's products include cheese, processed meats, packaged meals and Maxwell House coffee, while Heinz makes ketchup, sauces and frozen foods.

Kraft is 3G Capital's fifth major deal in the food and beverage industry since 2008, when it engineered a takeover of Anheuser-Busch by brewer InBev.

3G Capital also controls Restaurant Brands International Inc, formed when its Burger King business bought Canadian coffee chain Tim Hortons Inc.

Lazard was Heinz's financial adviser, while Cravath, Swaine & Moore and Kirkland and Ellis were its legal advisers.

Centerview Partners LLC was Kraft's financial adviser and Sullivan & Cromwell its legal adviser.

(Writing by Lisa Von Ahn; Editing by Kirti Pandey and Alden Bentley)

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