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By Christine Benz and Jeremy Glaser | 03-26-2015 10:00 AM

Friday Five: Heinz-Kraft Deal Makes for a Tasty Combo

The packaged-foods merger makes sense from a strategic standpoint, says Morningstar markets editor Jeremy Glaser. Plus, the Fed guessing game continues, and more.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com and welcome to the Friday Five. Joining me to share his insights on some of the top market news over the past week is Morningstar markets editor Jeremy Glaser.

Jeremy, thank you so much for being here.

Jeremy Glaser: You are welcome, Christine.

Benz: Jeremy, top corporate action this week is that Heinz and Kraft (KRFT) are getting together. Let's talk about your take and Morningstar's take on what this merger will mean.

Glaser: This really was the big piece of corporate news that came out this week. And Heinz is going to be purchasing; Kraft really is more of a merger. Heinz will own about 51% and Kraft will be 49% of the company. This will create the third-largest packaged-food company in North America behind PepsiCo (PEP) and Nestle (NESM). And I think we can look at this deal from a few different angles.

The first is really just strategic. And strategically, Erin Lash, our Kraft analyst, thinks that it does make a lot of sense. Heinz and their owner 3G Capital, the Brazilian private equity firm, really are known for being able to cut costs and to create very efficient enterprises. Kraft could probably use a little bit of that, and I think we could see a lot of more efficiency gains coming from there. Also, Heinz has much more of a global footprint, and that should help with the distribution of Kraft's products, maybe help kick-start growth a little bit into some markets that maybe are seeing a little bit of more growth in their packaged-goods space. That's something that that could be good for Kraft. So really, bringing these two together is something that makes sense from a strategic standpoint.

There is also the more financial angle, which is that Warren Buffett's Berkshire Hathaway (BRK.B) is going to be a big player here. They obviously went in with 3G Capital, and they had purchased Heinz. Buffett will own about a quarter of the combined Kraft-Heinz company, and he says that, as usual, his holding period is forever and that he really sees this as a long-term investment, a long-term use of Berkshire's capital, not something that he's going to make a quick buck on even though he has some very significant gains in it now.

I think that, for Buffett, this is a great use of his cash. Obviously, they are looking for ways to take that [roughly] $60 billion they have sitting around and get some higher returns on it. They don't need that much in order to continue to have that fortress balance sheet. This gives them the opportunity to do that, and it lets them work with 3G Capital--again, something Buffett says that he's been anxious to do, because he really sees them as very good operators, ones who can take businesses that maybe are underperforming a little bit and bring them back up to speed. This is the kind of deal that he really likes doing. I think it is a template for what we could see from Berkshire Hathaway; maybe even past Warren Buffett they will continue to work with these partners to get some of this capital to work.

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