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Kraft deal a curious bet for Buffett, but consumers have nothing to fear

Kraft Foods and H.J. Heinz, with help from its owners 3G Capital and Warren Buffett's Berkshire Hathaway, have agreed to merge. WSJ's Dana Mattioli explains on MoneyBeat.

Clearly, Warren Buffett loves mac n’ cheese.

The billionaire investor’s Berkshire Hathaway and Brazil-based investment firm 3G Capital – who bought Heinz together in 2013 – are partnering up again to buy Kraft Foods Group. 3G led the Burger King and Tim Hortons merger last year.

“The acquisition itself is not actually surprising – what I’m surprised about is who’s involved,” says Sylvain Charlebois professor of food distribution and policy at the University of Guelph. “Warren Buffett has always been interested in solid brands and companies doing relatively well but in Kraft’s case I would say numbers were sluggish in the last few years.”

He points to underperforming brands like Jell-O, Kraft Dinner, Velveeta and Oscar Mayer.

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“We saw what happened with Heinz, he had confidence in the band equity and I suspect it’s the same for Kraft but I do suspect the acquisition to lead to further restructuring,” says Charlebois pointing to lay-offs and cutting back of a few brands or doppelganger products created by acquisition.

The deal cheered investors with Kraft shares (KRFT) surging nearly 41 per cent to $86.43 in mid-day trade.

Consumer prices

But those who’re reading this on their phone as they race to the store to stock up on Jell-O and KD might want to hold up a second, says Charlebois adding that the merger won’t likely lead to sweeping changes.

“In terms of prices I don’t think it’s going to have much of a (noticeable) impact either,” he says given that the rising price of staples like meats and produce is already starting to creep into periphery commercial products like boxed foods.

“Now that food inflation is moving into the ‘centre of the store’ margins are starting to go up again,” adds Charlebois. “I suspect that’s what Mr. Buffett is actually seeing in Kraft.”

Well, either that or being the official King of Mac n’ Cheese.

The deal is still pending shareholder approval on the Kraft side but if it gets the go-ahead, it’s slated to close during the second half of the year creating the third-largest food and beverage company in North America; the fifth largest in the world.

The combined brand will have a better chance at pushing back distributors like Loblaws and Sobeys which have been increasingly encroaching on “centre of the store” territory with their private labels like President’s Choice and Our Compliments.

“There is a centre store battle going on and it’s not going to end now,” adds Charlebois. “I suspect that there will be more conflict and consolidation in the future involving other companies.”