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Kraft Heinz Co Eager to Find New Target to Implement 3G Capital Playbook

By Motley Fool Staff - Jun 7, 2017 at 3:00PM

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We explore the motivations behind the food and beverage company's acquisition appetite.

After its failed bid for Unilever, Kraft Heinz Co ( KHC 0.70% ) is on the prowl for another takeover target in the consumer goods industry.

In this segment from Industry Focus: Consumer Goods, our hosts analyze how a major Kraft Heinz investor, 3G Capital, informs the company's M&A philosophy.

A full transcript follows the video.

This video was recorded on May 30, 2017.

Vincent Shen: Our next company, Kraft Heinz, which is the $110 billion food and beverage company, actually appears to be shopping. Back in February, the company put up a massive $143 billion offer to combine with the Europe-based Unilever in what would have been one of the biggest deals in history. That would put major staples like Heinz Ketchup, Kraft Mac & Cheese, Jell-O, Breyers Ice Cream, Lipton tea, and Axe Body Spray all under the same roof. The $50 per share offer presented a 17% premium for Unilever, but the company soundly rejected the deal. And even if the two companies were able to agree on terms, the regulatory scrutiny would have been pretty intense due to their size and their overlapping geographic areas and businesses. But since February, after the Unilever deal fell through, Kraft Heinz have been planning its next move. Asit, before we talk about another deal that could be in the works, could you give us a little bit of background on who runs the show at Kraft Heinz, and why they seem so eager to close another acquisition?

Asit Sharma: Sure. Kraft Heinz is really aggressively managed and invested in by 3G Capital. This is a Brazilian investment firm which has its roots, decades ago, in three Brazilian partners, of which Jorge Lemann is probably the most visible and well-known. These investors started with small conglomerates back in Brazil. Listeners will be very familiar with Anheuser-Busch Inbev. The company Inbev was a Brazilian beer company, and through a series of mergers, it's become the largest beer brewer in the world. As our listeners know, the company acquired SABMiller at the end of last year, and now there's nothing left for Anheuser-Busch to do in terms of acquisition, except maybe look outside of the beer industry. This is a good example of how 3G Capital operates. They love to build firms up through mergers, and have a certain playbook that they implement. This playbook is usually isolating a company which is not very well-managed with just mediocre margins. They'll acquire that company and then cut costs dramatically. They did that by reducing headcount, reworking the supply chain, by implementing something called zero-based budgeting, which means that every year, instead of looking at last year's budget, you create it from scratch to see what your costs really are, and execute accordingly. 

So, they increased the value of the company, but they're really not that concerned about growing revenues. To me, that's actually a harder thing to do in the business world. It's one thing to find a company that's doesn't operate quite as smoothly as it should and optimize it. But to actually increase sales is a harder task. So, what many investors have noted about 3G Capital is their tendency, after they optimize the cost side of a company, to go in and make another acquisition. It's been a very good vehicle for investment return. Another prominent one of their initiatives was the acquisition of the old Burger King brand, taking that from a private company back to a public company, merging that with Tim Hortons, and slowly trying to take over the quick-service side of the food industry. That, in a nutshell, is how 3G Capital operates. They and longtime partner and financier Warren Buffett love to do deals together. 3G provides the operational aspects and some of the capital, and Uncle Warren lends billions of dollars usually in preferred stock. And it's been a very successful formula. So, here we have Kraft Heinz, which was created by these partners. They are now trying to figure out, we've optimized Kraft Heinz. What else can we acquire? This is where their latest target, Colgate-Palmolive, comes into the picture.

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