Veteran investor Warren Buffett got one of his elephants Feb. 14. His company Berkshire Hathaway and investing firm 3G will take packaged food maker H.J. Heinz private for a cash consideration of $23 billion.
After Michael Dell’s bid last week to take his company private for $24 billion, this marks another blockbuster transaction. According to SP Capital, total mergers and acquisitions (M&A) in 2013 stand at $182 billion compared to $58 billion at the same time in 2012.
“It’s my kind of deal, it’s my kind of partner,” Warren Buffett said in an interview with CNBC Feb. 14. His partner is Brazilian private equity firm 3G, which already owns a majority stake in Burger King. 3G boss Jorge Paulo Lemann approached Buffet on a shared plane ride early December 2012 about the transaction.
Buffett who was watching the company since 1980 soon got interested in the packaged-food maker from Pittsburgh, Pa. “It’s our kind of company. It’s got a group of fantastic brands led by Ketchup,” Buffet told CNBC.
3G Will Run Operations
Heinz, which was founded in 1869 and owns brands such as Heinz Ketchup, Weight Watchers, and Ore-Ida potatoes, will be taken private in the deal, which totals $28 billion including debt. Heinz’s chairman, president and CEO William R. Johnson is on board. “The Heinz brand is one of the most respected brands in the global food industry and this historic transaction provides tremendous value to Heinz shareholders,” he said in a press release.
According to Buffett, Johnson did a “fantastic job” at the company and is likely to retain his position. However, discretion over management appointments lies with 3G, which will run the operations of the company. “Any partnership where I don’t have to do the work is my kind of partnership,” said Buffet.
Both 3G and Berkshire put up $4.4 billion in equity giving each party 50 percent of voting rights. Berkshire will furthermore invest $8 billion and get preferred shares yielding 9 percent in exchange. The rest of the financing (around $6.5 billion) will be in the form of loans by J.P. Morgan and Wells Fargo.
Campbell or General Mills Could Make Competitive Bid
According to Citigroup, however, the $72.50 per share offer, a 20 percent premium to the stock’s closing price Feb.13, might fall short of satisfying shareholders, and Berkshire might have to up the bid or face competition from another suitor.
“Critically, as financial buyers, the Berkshire/3G consortium does not have synergies playing a role in the proposed offer; thus, this perhaps opens the door for a strategic buyer. We see Campbell and General Mills as the most logical strategic buyers for Heinz, with Campbell making the most sense,” Citigroup writes in a note.
The analysts think that either General Mills or Campbell could enter the bidding and pay more than what Buffett is offering. According to Citigroup, the deal would still be earnings-enhancing for General Mills and Campbell even if they pay $77.50. Furthermore, it is not expensive when compared to other deals in this category.
The current price is worth 2.4 times 2012 sales, which is in line with the historic average and also comparable to the 2.3 times sales that Kraft paid for British company Cadbury in 2010.
Buffett, however, is not intent on raising the offer price, despite having more than $25 billion of excess cash on his balance sheet. “They got every penny out of me,” he told CNBC. According to the current plan, the transaction is scheduled to close in the third quarter of 2013.
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