Buffett dips into ketchup business, buys Heinz
The acquisition of Heinz by Warren Buffett and 3G Capital is a landmark moment in the journey of a company that began selling horseradish in a Pennsylvania farming town in 1869.
Heinz went bankrupt just a few years later but went on to become one of the world’s best-known brands.
Yesterday’s $28 billion (€21 billion) acquisition will both bring Heinz back to its beginnings as a private company and give it a chance to become more global at a time when the US food industry is undergoing rapid transition.
“It’s an opportunity to build this brand more globally but fundamentally the company is returning to its roots,” said William Johnson, chief executive of Heinz, yesterday.
For his money, the Oracle of Omaha gets one of the nation's oldest and most familiar brands, one that's in refrigerators and kitchen cupboards all over the U.S.
The deal is intended to help Heinz accelerate its expansion from a dominant American name into a presence on grocery shelves worldwide.
The Pittsburgh-based company also makes Classico pasta sauces and Ore-Ida potatoes, as well as a growing stable of sauces suited to regional tastes around the world.
Buffett's investment firm, Berkshire Hathaway, is teaming with investment firm 3G Capital to snap up Heinz, which had long been a subject of takeover speculation. New York-based 3G is best known for its acquisitions of Burger King and its role in the deals that created Anheuser-Busch InBev, the world's biggest beer maker.
Heinz is being acquired at a moment of strength for the company but it follows a recent period of investor unrest about its performance.
In 2006, Nelson Peltz, the activist investor who now sits on its board of directors, took a 5 per cent stake in the company and pushed Johnson to cut costs, streamline operations and reinvest in marketing.
In recent years, Heinz has been something of a trailblazer in its own right, actively seeking deals in Brazil and China and repackaging its core ketchup to make it easier for Americans to dress French fries in new ways.
Although ketchup and sauces still account for just under half its sales, Heinz has expanded over the years to include a much broader array of products across 200 countries, including ABC soy sauce in Indonesia, Quero tomato sauces and vegetables in Brazil and Complan nutritional drinks in India.
In 2010, the company bought Foodstar, which makes Master brand soy sauce and fermented bean curd in China.
However, the company remained under pressure to unload some of its struggling brands and its frozen foods business, and analysts say that going private could aid in such disposals.
People familiar with the Heinz transaction said 3G Capital was hungry for a new deal, and set its sights on Heinz.
The group approached Buffett about joining forces last December, and discussions with Heinz picked up in earnest in the past six weeks.
Berkshire is putting up $12.12 billion in return for half of the equity in Heinz, as well as $8 billion of preferred shares that pay 9 percent, according to a filing with the Securities and Exchange Commission. 3G Capital will run Heinz, and Berkshire will be the financing partner.
By taking the company private, Johnson said, Heinz will have the flexibility to react more quickly without the pressure of satisfying investors with quarterly earnings reports.
The company's push to go global began more than a decade ago, and about two-thirds of its sales already come from outside the U.S.
Heinz is increasingly focusing on emerging markets, where it expects to get about a quarter of its sales this year. Like other packaged food companies, it is betting that staking an early claim in countries with multiplying ranks of middle-class customers will secure its own future.
“The value opportunity for the shareholders was too good to pass up,” Johnson said.
“This is the largest transaction in history for a global food business.”
Heinz is a prize because it has the type of name recognition that takes years to build, said Brian Sozzi, chief equities analyst for NBG Productions. One testament to the strength of the brand has been the company's ability to raise prices even in the competitive market, he said.
For Buffett, the deal, which is expected to close during the third-quarter of this year, is a chance to further cement his legacy.
“Buffett is trying to make the non-insurance businesses more significant,” says Vitaliy Katsenelson, a value investor and long-time Buffett watcher.
“Buffett is willing to pay so much more than he would in the past, but he wants bulletproof businesses that can’t be destroyed.”
Heinz appears to be a classic fit for Mr Buffett, who likes consumer companies and has taken equity stakes in Coca-Cola.
Buffett has recently said that he's been hunting for elephant-sized deals. At the end of last year, he said on CNBC that he had about $47 billion in cash available.
Berkshire's biggest acquisition ever was its $26.3 billion purchase of BNSF railroad in 2010.
Last year, Buffett also starting building a newspaper company with the $149 million acquisition of 63 Media General newspapers and several other small or mid-sized newspapers. Berkshire now owns 28 dailies and a number of other publications.
Berkshire's real estate unit also bought the Prudential and Real Living real-estate franchises nationwide last fall.
The deal is a departure for Berkshire Hathaway. Generally, Buffett prefers to buy entire companies and then allow the businesses to continue operating much the way they were before. Berkshire has also helped finance deals before - most recently during the financial crisis of 2008, when he made lucrative deals for Berkshire when few other companies had cash.
Heinz shareholders will receive $72.50 in cash for each share of common stock they own. Based on Heinz's number of shares outstanding, the deal is worth $23.3 billion excluding debt. Including debt, it's worth about $28 billion.
The price for the deal represents a 20 percent premium to Heinz's closing price of $60.48 on Wednesday. Heinz said the deal was unanimously approved by its board.
"It's our kind of company," Buffett said in the CNBC interview, noting Heinz's signature ketchup has been around for more than a century. "I've sampled it many times."
Sources:
http://www.irishtimes.com/newspaper/finance/2013/0215/1224330056725.html
http://www.eveningsun.com/business/ci_22591316/buffett-dips-into-ketchup-business-buys-heinz
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