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March 27, 2015

Brazilian Magnates Inflict Dreadful Austerity on American Workers

Okay, that’s a highly tendentious headline for an article full of interest. It furnishes the canny observer with another aspect of the austerity puzzle.

A key ingredient in 3G Capital Partners LP’s recipe for reshaping the U.S. food industry — reflected in its roughly $49 billion deal to acquire Kraft Foods Group Inc. — is an arcane-sounding financial tool that slashes costs by focusing on details as minute as how to make photocopies.

On Wednesday, 3G confirmed plans for its H.J. Heinz Co. unit, which it bought two years ago, to buy the maker of Kraft cheese products and Oscar Mayer deli meats. The transaction extends the Brazilian private-equity firm’s acquisition spree in the food industry, where its previous purchases include Burger King Worldwide Inc. and Canadian coffee-and-doughnuts chain Tim Hortons Inc.

The latest deal would unite two of the industry’s biggest names in a company with combined revenue of about $28 billion and a roster of brands that are traditional staples of American kitchens but are struggling to keep pace with shifting consumer tastes.

At Kraft, as it has elsewhere, 3G plans to implement something called zero-based budgeting, an austerity measure that requires managers to justify spending plans from scratch every year. The technique has triggered sweeping cost cuts at 3G-related companies including Heinz — from eliminating hundreds of management jobs to jettisoning corporate jets and requiring employees to get permission to make color photocopies.

Investors have grown increasingly aggressive about second-guessing management’s operational decisions and use of capital. Several activist investors, including Nelson Peltz and William Ackman — himself a personal investor with 3G — have praised the Brazilian firm’s cost-cutting methods. Investors’ enthusiasm was evident in Kraft’s stock price Wednesday, which soared 36% on the merger news.

Private equity firms undertake to pool select partner capital, as opposed to accepting public shareholders, in order to operate in capital markets based on some management or financial strategy. Many of them focus chiefly on investing in rising enterprises, while they are still privately-held; some aspire to move these privately held enterprises to the stage of a public offering of stock, which, if successful with return enormous profit to the early investors. The downside risk lies in this: most enterprises fail, some fail spectacularly.

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