Kraft Heinz Merger Analysis

This assignment requires a comprehensive analysis of the Kraft-Heinz merger. Students need to examine the rationale behind the merger, including potential synergies and benefits like tax advantages, market power consolidation, and efficiency improvements. The analysis should delve into the financial aspects, referencing sources like annual reports and market data to assess the merger's impact on both companies' market capitalization and share prices. The assignment also encourages students to consider the broader implications of the merger for the food industry.

Running Head: Financial Studies
Mergers and Acquisition

Financial Studies 1
Question 1:
Part a)
Initial Outflows
Initial Investment $ 2,20,000.00
Working Capital $ 30,000.00
Fixed Overhead $ 60,000.00
Total $ 3,10,000.00
Depreciation Calculation
Residual Value $ 40,000.00
Useful Life 3
Cost Of Asset $2,20,000.00
Depreciation Per Annum $ 60,000.00
Depreciation = Cost Of Asset- Residual Value
Useful Life
= $ 220,000-$ 40,000
3
=$ 60,000
Sales Units
(A)
Selling Price
Per Unit (B)
Variable Cost
Per Unit (C)
Contribution Per
Unit (B-C) Total Contribution (A * C)
10000 $ 60.00 $ 36.00 $ 24.00 $ 2,40,000.00
11000 $ 63.00 $ 37.08 $ 25.92 $ 2,85,120.00
12100 $ 66.15 $ 38.19 $ 27.96 $ 3,38,286.96
contribution
(i)
DEPRECIATION
(ii)
INSPECTION
(iii)
NET INCOME
BEFORE TAX
(iv)= (i- ii-iii)
PROFIT
AFTER TAX
(v)=[iv*
(1-.15)] CFAT (vii)
$ 2,40,000.00 $ 60,000.00 $ - $ 1,80,000.00 $ 1,53,000.00 $ 2,13,000.00
$ 2,85,120.00 $ 60,000.00 $ 3,000.00 $ 2,22,120.00 $ 1,88,802.00 $ 2,48,802.00
$ 3,38,286.96 $ 60,000.00 $ - $ 2,78,286.96 $ 2,36,543.92 $ 2,96,543.92
YEAR CFAT
DCF
@10.25
% PV
0 $ -3,10,000.00 1 $ -3,10,000.00
1 $ 2,13,000.00 0.893 $ 1,90,209.00
2 $ 2,48,802.00 0.797 $ 1,98,295.19

Financial Studies 2
3 $ 2,96,543.92 0.712 $ 2,11,139.27
3 $ 48,000.00 0.712 $ 34,176.00
3 $ 40,000.00 0.712 $ 28,480.00
NPV $ 3,52,299.46
Part b)
The Arbitrage pricing model and capital asset pricing model are the financial models that
measures the asset’s potential to generate returns or risks. CAPM functions only one the
assumption that investors are risk focused and hence they consider only mean and variances
of the returns whereas APT considers multiple factors to determine the price of stock
(Huberman & Wang, 2005). APT is an alternative to CAPM in overcoming the weaknesses.
It uses relatively realistic assumptions generated through a simple arbitrage argument. Also,
the explanatory power of APT is better than CAPM. It captures even non-market forces that
also cause movement in securities (Ross, 2013).
Question 2:
Part a)
Introduction:
Merger is the economic arrangement where two or more than two companies come together
to share the business platform with the objective of improving the economies of sales,
maximisation of shareholder’s wealth, achieving market leaderships and gaining the other
financial synergy benefits out of merger (Angwin, 2007). Synergy is the situation where the
value of combined firm is greater than the aggregate of individual values of the combining
firms (Bramson, 2000). Before merger, H.J. Heinz and Kraft Foods Group were two different

Financial Studies 3
food corporations. Heinz was internationally dealing in a wide range of products such as
ketchup, sauces, frozen foods, soups, nutrition foods for infants etc. Its products were in high
demand globally. Whereas Kraft Group was the largest company dealing the packaged foods
and also the beverages. It primarily dealt in the products like cheese, refreshment beverages,
coffee, snack nuts and some grocery products. In fiscal year 2014, Heinz has operated on the
global platform where 61% of its sales were generated from either outside the North America
or from the cross border market. The economies that are emerging have contributed 25% of
Heinz’s sales. During this period Kraft Foods Group made 98% of their turnover from North
America in year 2014. It had a profit before tax of $ 1.4 billion in 2014.
In the early 2015, the Kraft Foods Group announced its merger with Heinz Company which
was arranged by Berkshire Hathaway and 3G capital. The merger transaction was concluded
in the second half of 2015. Along with Berkshire Hathaway and 3G capital, the shareholders
of the Heinz held 51% stake in the Kraft Heinz Company. The remaining 49% stake is held
by the shareholders of Kraft group. The shareholders of Kraft Foods are also given the one
time dividend per share of $ 16.50, the cost of which will be borne by Berkshire Hathaway
and 3G capital. The merger deal was valued at $45 billion on and around and the revenue
from the sales were expected to be around $28 billion.
The analysis of revenues, share prices and the net income before and after merger have been
done in the table below:
Before Merger-2015 ($M)
After merger-2016
($M)
Kraft Heinz
After merger-2016
($M)
Revenues 4,500.00 2,600.00 26,487.00
Share
price 64.00 72.49 79.00
Net
income 551.00 (164.00) 3,632.00

Financial Studies 4
Craft Heinz After merger-2016
($M)(5,000.00)
-
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
Revenues
Revenues Net income
Figure 1 Revenues Before and After Merger
Craft Heinz After merger-2016
($M)
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
Share price
Share price
Figure 2 Share Prices Before and After Merger
The purpose of the merger was to sell the well-recognised bands of the Kraft Group in the
international market to boost up the revenue growth of the company thereby improving the
economies of scale majorly in the market of North America. The above graphical
representation depicts the change in revenues. The revenue for year 2016 of $ 26487 million
is after merger revenue of the Kraft Heinz Company (the merged company). The before
merger revenues of both the companies i.e. $ 4500 million of Kraft Group and $ 2600 million
of Heinz company, were considerably low and hence merger has created synergy for the
resultant company. Moreover, the before merger share prices of Kraft and Heinz were around
$ 64 and $ 72.49 respectively for the year end 2014. However, as a result of merger the share
price of merged company was increased to $ 79. Also, the net income of Kraft Group was

Financial Studies 5
around $ 551 million and Heinz had a negative net income of around $ 164. But, due to
merger the net income of the merged company increased to $ 3632 million.
As a result of merger, Kraft Heinz Company has achieved the 3rd position among the largest
food and beverages companies in the entire North America and also it has been ranked as
fifth largest food (and beverages) company across the world in terms of sales for the year.
The merged company has created a unique portfolio of various iconic brands. The merger has
proved to be a historic transaction that has provided the merger corporation a platform to lead
the food industry at both national as well as international level. The complementary feature of
two different brand portfolios of Heinz and Kraft Foods Group offers substantial synergy
opportunities, as a result of which, the investment in the areas of innovation and marketing
has increased. The merger of two powerful businesses and their iconic brands has enhanced
the scope of growth of their merged business. Moreover, the credit rating of the Kraft Foods
Group was relatively better than the Heinz Company, therefore, the merger gave the privilege
of better credit ratings to the Heinz and Kraft, the merged company. It allowed Heinz to
refinance their high yielding debt obligation with low yield debt. Merger at time was the new
trend in the food industry and was opted to strategically grow and expand the market for the
products dealt by the company so as to ultimately increase the operating margins i.e.
profitability of the merged company. The increased sales volume will also provide the
company a better bargaining power with its prime clients such as speciality food stores or
restaurants and also the large retail outlets. Also, the change in the style of operations
strategies will promote the cost savings.
However, the analysts have argued that the giant merger of Heinz and Kraft has brought
less of synergies and more of cost cutting initiatives. The management of both the companies

Financial Studies 6
have announced that the merger will realise $1.5 billion by savings the annual costs by the
end of year 2017 (Stowell et.al, 2017).
According to one of the well-known research analysts Raphael Moreau, there are no obvious
synergy benefits from the merger of these two corporations as they have operated in
extremely different categories. But, yet it has offered them the cobranding opportunities
especially for the sauces and ready meal brands as Heinz always had a growth potential in
Latin America as well as Asian Pacific Region. Moreover, the merger, in spite of extreme
competitive nature of the food industry and other industry challenges, has provided the
companies with increased growth of revenue and market share. The earnings per share
offered to the shareholders of the merged company has improved to 87 cents to a share
whereas it was 67 cents per share in previous years. As a part of synergy the prices of the
company’s combined stock has also risen up (Forbes, 2015). Additionally, the preferred stock
of Heinz that turned callable in 2016 is also expected to be replaced with investment grade
debt that is low yielded thereby reducing the overall cost of capital of the merged company.
Part b)
The market capitalisation of a company is its total value in the market. This is determined by
multiplying the market price of the shares of the company with its total outstanding shares as
on the date of determination (Auerbach, 2008). When two or more firms merges with each
other, their individual market values are considered to identify the total value of merger deal.
If the market capitalisation of the merged company is more than the total of market
capitalisation of all the individual firms that are involved in the merger, then the difference
between the two will be called as synergy (Devos, Kadapakkam & Krishnamurthy, 2008).
The above discussed whole scenario of merger deal can be represented by a mathematical
equation that is shown below:

Financial Studies 7
V (A) + V (B) + synergy = V (A+B)
Where,
V= Market capitalisation of the company.
A = merging company
B = another merging company (Coyle, 2000).
Here, Heinz has agreed to offer one share of the new company (merged company) to the
shareholders of Kraft Groups for each share possessed by them in Kraft Company on the
record date of merger. This purchase consideration is paid by Heinz to acquire the Kraft
Groups as a target to achieve the economies of sales and other benefits out of merger.
Now, to check whether the equation holds true in case of merger of Heinz Company and
Kraft Foods Group, the data collected from various sources will be applied as below:
V (A) = Market capitalisation of Heinz Company (Note 1)
V (B) = Market capitalisation of Kraft Company (Note 2)
V (A+B) = Market capitalisation of Kraft Heinz Company (Note 2) = USD 104325 Million
(Source: Guru Focus, 2017)
Heinz Company Kraft Foods Group
Market price as on 31st
December, 2014
$72.49 (Source: Investor’s
Hub, 2014)
$ 62.66 ( Source: Kraft
Heinz, 2014)
Number of shares
outstanding on 31st
December, 2014
432096 (Source: Heinz
Annual Report, 2014)
602402816 (Source: Kraft’s
Annual report, 2014)
Market Capitalisation $ 31.32 Million $37746.56 Million

Financial Studies 8
Note 1: For both the individual companies to merger, Market value of company’s stock and
the number of outstanding shares as on the end of the last day of year 2014 (31.12.2014) is
taken since in year 2015 the merger of Heinz with Kraft took place.
Note 2: The market capitalisation of Kraft Heinz Company is taken for the post-merger
period, i.e. as at the end of 1st half of year 2017.
Since the [PV (Acquirer) + PV (Target) i.e. $37777.88 Million < PV (Combined Firm) i.e.
$104325 Millions] it would be appropriate to say that it satisfies the merger theory.
Conclusion:
Through the above application of merger theory in the present case of Heinz and Kraft
companies, it can be concluded that the merger has created true synergetic benefits for the
merged company by improving its market capitalisation. The synergy has also been achieved
due to several other factors such as increased revenue growth and the net income of the
merged company. The merger event has significantly contributed to the cost savings in
certain areas and consequently the overall profitability of the company has enhanced.

Financial Studies 9
References:
Angwin, D., 2007. Mergers and acquisitions. John Wiley & Sons, Ltd.
Auerbach, A.J. ed., 2008. Mergers and acquisitions. University of Chicago Press.
Bramson, R.N., 2000. Mergers and Acquisitions. Training & Development, p.59.
Coyle, B., 2000. Mergers and acquisitions. Global Professional Publishing.
Devos, E., Kadapakkam, P.R. and Krishnamurthy, S., 2008. How do mergers create value? A
comparison of taxes, market power, and efficiency improvements as explanations for
synergies. The Review of Financial Studies, 22(3), pp.1179-1211.
Forbes, 2015, Analysis of the Kraft-Heinz Merger, available at:
https://www.forbes.com/sites/greatspeculations/2015/03/30/analysis-of-the-kraft-heinz-
merger/#71014c1ac9a8 assessed on, 30th Nov, 2017.
Gurufocus, 2017, The Kraft Heinz Co (NAS: KHC) Market Cap (M): USD 98,806 Mil,
available at: < https://www.gurufocus.com/term/mktcap/NAS:KHC/Market-Cap-M/The-
Kraft-Heinz-Co> assessed on, 30th Nov, 2017.
Investor’s Hub, 2017, Heinz H J Historical Data,
https://ih.advfn.com/stock-market/NYSE/heinz-h-j-HNZ/historical/more-historical-data?
current=0&Date1=01/01/12&Date2=12/31/14 assessed on 30th Nov, 2017.
Huberman, G., 2005. Arbitrage pricing theory (No. 216). Staff Report, Federal Reserve Bank
of New York.
Investor’s Hub, 2017, Heinz H J Historical Data, available on:
Kraft Heinz’s Annual Report, 2015, H. J. HEINZ CORPORATION II, available on
http://ir.kraftheinzcompany.com/secfiling.cfm?filingID=1600508-15-11&CIK=1600508
assessed on 30th Nov, 2017.

Financial Studies 10
Kraft’ annual report, 2014, Kraft Foods Group, Inc. available at
http://files.shareholder.com/downloads/ABEA-3QV6OO/5641447408x0x730413/145F2E19-
6958-4EA2-9111-B31F2E8CEF47/filing_10K.pdf assessed on 30th Nov, 2017.
Ross, S.A., 2013. The arbitrage theory of capital asset pricing. In HANDBOOK OF THE
FUNDAMENTALS OF FINANCIAL DECISION MAKING: Part I (pp. 11-30).
SECURITIES AND EXCHANGE COMMISSION, 2015, H.J. HEINZ HOLDING
CORPORATION, available on
https://www.sec.gov/Archives/edgar/data/1637459/000119312515126301/
d898418ds4.htm#toc assessed on: 30th Nov, 2017.
Stowell, D.P., Stowell, D.P., Kawar, N. and Kawar, N., 2017. HJ Heinz M&A. Kellogg
School of Management Cases, pp.1-25.