Buffett, 3G transform Kraft from laggard to best stock

[NEW YORK] Kraft Foods Group shareholders just saw one of the food industry's worst stocks transformed into the best.

Shares of the maker of macaroni and cheese had been among the poorest-performing food and beverage companies in the Standard & Poor's 500 Index this year. As of Tuesday, analysts had been forecasting a mere 6.5 per cent upside to Kraft shares over the next 12 months, trailing the projected gains of a majority of members of the benchmark index, according to data compiled by Bloomberg.

That was until Warren Buffett and 3G Capital's Jorge Paulo Lemann came along.

3G and Mr Buffett's Berkshire Hathaway are merging Kraft with HJ Heinz in the year's biggest deal so far, a sequel to their 2013 buyout of the ketchup maker. Kraft shareholders will get to own 49 per cent of the new entity and receive a special dividend of US$16.50 a share.

Kraft shares soared on the news, climbing 40 per cent to $86.09 at 11:49 AM in New York. That's now a better return than any other major U.S. packaged-foods maker is expected to generate over the next 12 months.

"For Kraft shareholders, it's a phenomenal deal," Brian Yarbrough, a St Louis-based analyst at Edward Jones & Co, said in a phone interview. "For Kraft to go grow these brands internationally would just take years and years and years. Now they can use the Heinz platform."

Before accounting for the cost-cutting that 3G is known for and Heinz's half of the equation, the offer may value Kraft at roughly 24 times earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. 3G and Berkshire paid about 14 times Ebitda for Heinz.

The deal values Kraft at about US$6 billion, before net debt, based on its stock price Tuesday and the cash payment its shareholders will receive. The final transaction value is difficult to pin down, though, because Heinz is private and it also remains to be seen at what price the new company's shares will trade.

BLOOMBERG