Combination with Heinz could open global gateways for growth for Kraft.

PITTSBURGH — Sometimes, when you take a peek under the hood, you find more problems than you bargained for. But for John Cahill, chairman and chief executive officer of Kraft Foods Group, that peek evidently opened the door for opportunity.

A little more than a month ago Mr. Cahill unveiled plans to work with Kraft’s management team and become more immersed in the business. At that time, he said he planned to “really get under the hood” and “develop a well-informed comprehensive plan that will accelerate the pace of change and put Kraft on a clear path to long-term sustainable growth.”

A potential merger with H.J. Heinz Co. that would vault the new company into the No. 3 spot among North American food and beverage companies in terms of annual sales certainly qualifies as change. The only companies it would trail would be PepsiCo, Inc., and Nestle S.A., according to Kraft.

Once the dust settles, Heinz shareholders would own 51% of the combined company which would be called The Kraft Heinz Co. As part of the transaction, Kraft Foods shareholders will receive stock in the combined company as well as a special cash dividend of $16.50 per share, which represents 27% of Kraft’s closing stock price on March 24. The cash dividend payment will total approximately $10 billion and be funded by an equity contribution from Berkshire Hathaway and 3G Capital, the owners of Heinz. The agreement has been approved by the boards of directors of both companies.

In a March 25 conference call with analysts to discuss the transaction, Mr. Cahill, who is set to become vice-chairman of the new company, said there are numerous opportunities for revenue synergies, including the benefits of increased scale and the potential to revitalize the two companies’ iconic brands with brand extensions and offerings that would be difficult to execute for each of the companies on a standalone basis. But it is the international opportunity that Mr. Cahill said he was most excited about.

“Kraft’s brands are already well known across the globe,” Mr. Cahill said. “Our ambition is to leverage these equities by bringing the right brands to the right markets. Heinz is the perfect platform to enable Kraft to execute in its obvious right-to-win categories across the globe.”

Kraft’s brands include Macaroni and Cheese, Velveeta, Oscar Mayer, Lunchables, Planters, Philadelphia Cream Cheese, Kool-Aid and Maxwell House, while Heinz’ portfolio includes the company’s signature Heinz ketchup and sauces as well as Ore-Ida, Classico, Complan, ABA, Quero, Plasmon, Master and Wattie’s.

“To illustrate the global reach of the combined company, consider that 34% of our combined sales will come from international markets, with 24% outside North America,” Mr. Cahill said. “Europe will comprise approximately 10% of the combined business, with APAC (Asia-Pacific) and the rest of the world contributing 14%.”

He said this international exposure will become “critical” as certain licensing agreements with Mondel?z International that were entered into several years ago begin to expire, opening the door to “ample opportunity to market certain brands overseas, particularly in Central and South America and in Europe.”

“The potential is already there, and the combination with Heinz allows us to realize that potential in the very near term,” he said. “To better illustrate this point, consider the 14 international markets in which the Kraft brand has at least 80% brand awareness. These aren’t just any markets. These are large and growing countries spread around the globe. But most importantly, in 13 of these 14 countries, Heinz already has meaningful go-to-market infrastructure, particularly in the U.K., Australia, Italy, China, Brazil and Indonesia. Clearly there is much to be excited about here.”

In an interview on CNBC, Erin Lash, an analyst with Morningstar, called the Kraft-Heinz merger “an interesting transaction.”

“Kraft’s brands are obviously focused right now in the U.S., so combining with Heinz provides that international distribution platform,” Ms. Lash said. “And further, Kraft has been working during its time as an independent organization to cut costs and improve the efficiency of its operations, something that Heinz has been undergoing over the last two years under the ownership of 3G Capital.”

Lianne van den Bos, a food analyst with Euromonitor International, said the merger will give Kraft and Heinz “a huge stake in staple categories such as dairy, processed food and sauces, dressings and condiments. These are mature markets, posting low growth rates as they reach a saturation point compared to more dynamic categories such as baby food. Therefore, the main emphasis will be on cost-cutting as well as improving margins and as such creating a lean organization, just like 3G has done in the past with Heinz. With this merger, Kraft Heinz will become a powerhouse of staples.

“Another important point to note is that staples have a high percentage share of private label, making power brands ever more important. With this merger Kraft and Heinz will gain even more influence in the retailing landscape to position their brands against private label as well as other companies.”

Currently, Kraft Foods is the fourth largest food and beverage company in North America, with a No. 1 or No. 2 position in 17 core categories. The Kraft brand has a 98% household penetration in North America and seven of the company’s brands have annual retail sales of more than $1 billion.

Meanwhile, Heinz ranks No. 11, but it has a portfolio of iconic global brands that have a No. 1 or No. 2 market share in more than 50 countries. The company has a diversified geographic footprint with approximately 60% of sales outside of North America.

“Heinz, like Kraft, has an outstanding portfolio of brands,” said Bernardo Hees, c.e.o. of Heinz and soon-to-be appointed c.e.o. of the new Kraft Heinz Co. “The Heinz brand itself has a core, obviously in ketchup, where Heinz is the No. 1 brand globally, but also in beans and soups in the U.K. Strong international brands like ABC in Indonesia, Master in China and Quero in Brazil make Heinz a truly global player with over 60% of its sales outside of North America. In addition, Heinz brings to the table significant exposure to growing emerging markets, which represents 25% of sales.

“Heinz’s experienced global leadership team has transformed into one of the most profitable companies in the industry. And we believe that we can continue to have room to improve.”

While nearly everyone is familiar with Heinz ketchup, Mr. Hees drew attention to the company’s other brands that have been locally dominant in a variety of attractive categories in developed and modern markets.

“For example, Heinz beans hold the No. 1 position in the U.K.,” he said. “Plasmon holds the No. 1 position in Italy wet baby food. ABC holds the No. 2 position in Indonesian soy sauce. And Master holds the third position in China soy sauce, and so on.

“Heinz today has also a truly international portfolio. As I mentioned earlier, over 60% of our sales are outside of North America. Additionally, 25% of sales are in emerging markets, a number that has grown dramatically over the last decade. That emerging market exposure is balanced and well diversified over key geographies. This international exposure is really key to our long-term growth story and certainly will be important for the combined company going forward.”

The combined company is expected to save about $1.5 billion in annual costs by the end of 2017, the companies said.

Warren Buffett’s Berkshire Hathaway and 3G Capital acquired H.J. Heinz in 2013 for $28 billion, and just last winter worked together on Burger King’s takeover of Tim Hortons, which has been combined into Restaurant Brands International.

In an interview on CNBC on March 25, Mr. Buffett said Berkshire Hathaway plans to be in the Kraft Heinz stock “forever.”

“This is a business with us, it’s not really a stock,” he said. “It’s a company that we’ll own 26-and-a-fraction per cent of. It’s where the new Kraft Heinz company is 10, 20, 50 years from now that counts to Berkshire Hathaway. I like the brands, and I like the management a whole lot, and I think we’ll do fine over time, but we will see how much Philadelphia Cream Cheese and Oscar Mayer hot dogs and a whole host of other products people are eating 10 or 20 or 30 years from now. These are brands that I liked 30-plus years ago. I like them today, and I think I’ll like them 30 years from now.”

Mr. Buffett said the combined company should be able to cater to people with many different tastes.

“There’s 7 billion people in the world, and a lot of them have different tastes — the tastes that Kraft, and Heinz for that matter, have appealed to over many, many decades,” he said. “Heinz goes back to 1869. I think those tastes are pretty enduring. There will be plenty of people who will want to eat other things, but there will be plenty of people who will want to eat the products that Kraft Heinz turns out. And there are new products coming all the time. At Heinz we have at least four new products that will be hitting the shelves with this year. So it’s not a static operation at all. And we have a management I’m willing to bet a lot of money on.”