CHICAGO (Reuters Breakingviews) - The Brazilian billionaires at 3G Capital that turned Kraft Heinz and Anheuser-Busch InBev into mega-acquisition machines will dive back into the buying business in the coming year. Their next target should be Mondelez, the $66 billion food conglomerate that failed to coax chocolate-maker Hershey into a sale in 2016. A deal will require some unusual ingredients.
3G - co-founded by banker-turned-beer-magnate Jorge Paulo Lemann - gobbled up Heinz for $28 billion in 2013 with the help of Warren Buffett. Two years later, Lemann and his partners combined Heinz ketchup with Cheez Whiz with a $36 billion swoop on Kraft. Speculation about 3G's next target heated up in early November after a Brazilian blog said it was raising up to $10 billion of fresh funds. Using the combined Kraft Heinz to swallow Mondelez, whose shares gained as much as 12 percent on Wednesday after a Swiss news report said a bid was in the works, would be a natural next step.
While the maker of Cadbury chocolates run by Irene Rosenfeld has been cutting costs since it was spun out of Kraft four years ago, it's still not as profitable as its former parent. That would give 3G new fat to cut after it finishes stripping out $1.5 billion of merger-related savings at Kraft Heinz by the end of 2017.
It would be about a $100 billion mouthful, including assumed debt, supposing 3G paid a 30 percent premium. The equity required would be daunting: Kraft Heinz owners would have to fork over nearly $60 billion of it to keep combined net debt below five times EBITDA. If they use Kraft shares, 3G and Buffett - who today own just over half the firm - would end up with less than a third of the enlarged entity.
But they'd still be the biggest shareholders by a mile. And the financial rewards could be mouth-watering. 3G sought savings worth 6 percent of combined sales in the Kraft Heinz merger. Apply that to the 2017 revenue analysts are penciling in for Kraft Heinz and Mondelez, and the buyers could squeeze out over $3 billion more pre-tax income a year, worth more than $20 billion taxed and capitalized.
If Mondelez proves too rich, Kraft could seek out a smaller target. Buying cereal makers Kellogg or General Mills without racking up excessive debt would require a more manageable $12 billion and $22 billion of equity, respectively. But neither offers the scale of a Mondelez deal. Whichever way the cookie crumbles, 3G is poised to take another bite out of Corporate America.
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