Berkshire acquires Heinz for 72.5 p/s

[WhoIsWarren]

WEB on CNBC:

 

http://video.cnbc.com/gallery/?play=1&video=3000148043

 

Btw, WEB mentions that they had about $27 billion in excess cash at EOY, and BRK is still looking for an elephant after this Heinz deal.

 

A couple of interesting things from the CNBC interview.

 

In relation to Heinz:

 

"3G is a good operator, too.  as evidenced by -- they weren’t actually the owner of Anheuser-Busch, but it's the same -- it's the same managerial group. I don't think I've ever seen a better developed management group than the one that Georgy Paolo has done developed over the years, in Brazil. He has been incredible."

 

And later he was asked: "Do you expect to use Heinz or does 3G expect to use Heinz as a rollup vehicle? They've done this now in the beer industry, will they try to do this with other brands?"

 

Yeah, well i would say this. Georgy Paolo and I are very good friends. We've talked about the deal and neither he nor I like to think of this as our last deal. I mean, we will be -- we will be buying things. He generates cash. We generate cash. I love being partners with him. And, it's certainly possible that, you know, there's nothing in mind -- no plan in mind now. Certainly in terms of anything specific but I would hope that over time that we would be adding to this."

 

So Georgy and his team is great (anyone for Burger King??) and we really should expect this story to grow legs.

 

Separately he was asked about the recent speculation linking him to NYSE.

 

"Well, I guess the answer is I didn't see anything because i was…..never contacted personally in any way, I never had a phone call, e-mail from anybody in connection with the NYSE. There was some contact from somebody else at the office but like I say nobody, nobody from investment banking firm ever put a phone call in to me or e-mailed me, and, and when they prepared the proxy nobody checked with me."

 

Q: And would you have been interested?

 

"No."

 

The answer unfortunately wasn't expanded on, but I'd love to know why Buffett was flat out not interested in NYSE.  I have to say that I was surprised to hear the story that they had bid, because in my view there is so much change and potential for change in that business when I look out 20 years or so. 

 

Reminds me of Buffett's letter exchange with a Microsoft executive back in the mid-90s or so -- true, Microsoft had a near monopoly position and had great pricing power, but the PC industry was at risk of major change as Buffett looked out 20 years.

 

Then again, maybe he said "no" because the price was too high.....

[Kiltacular]

Buffett really likes these preferred deals! Any reason why? My guess is they provide a nice midway point between bonds and common equity for Buffett's insurance reserves.

 

LC,

 

I think you hit on one significant reason.  These things stay at face value while stocks inside the insurance operation fluctuate with market value.  I think that constrained Buffett during the stock market crash when regulators must have been breathing down his neck when WFC and AXP were in single digits and meanwhile the regulators are seeing that AIG is insolvent.

 

In addition, I believe that the dividends from the preferreds are taxed at 13% (or thereabouts) for Berkshire -- like dividends from Coke or WFC -- so it is much more attractive than getting interest on similar bonds. 

 

[jay21]

So whats the cap structure look like for this?

 

$28b EV

$4b debt

$8b preferreds

 

leaving $16b of equity?  BRK seems to be paying $13-14b total, so maybe $6b common for BRK and $10b common for 3G.

 

Does that sound right?

 

 

[zarley]

For $12 billion BRK gets half the equity and a reported annual preferred dividend of more than $700 million. Barring total collapse of the Heinz business, he's got a floor of 6% annual return on the money.

 

If the preferred is structured like the other BRK deals with a 10% call-back fee, if it gets bought back, he'd get $9 billion back. So, he'd have half the equity for $3 billion invested, less the cumulative dividends he's received.

 

So, for example, if the preferred get bought back in 5 years, he'd have all his money back and still have half ownership of Heinz.

 

Doesn't seem too bad to me. . . maybe not as good as the BAC deal or Swiss Re, but nice enough.

[xo 1]

Zarley:  thanks for the summary, which adds a nice perspective.  It will be interesting to see the specifics on the Preferreds.  It makes the economics of the partnership fascinating, as is generally the decision to team up with 3G/Lemann.  It sounds as if the management expertisement was a significant enticement for BRK - similar to deals with Leucadia.  Also wonder at the timing - Is there any reason why the deal couldn't have been struck earlier at a lower price? It will be interesting to watch 3G's role going forward, especially if there are other acquisitions down the road. 

[jay21]

http://www.marketfolly.com/2013/02/warren-buffetts-berkshire-hathaway-3g.html

 

- Berkshire puts $4.4 billion in equity

- 3G puts $4.4 billion in equity

- Berkshire buys $8 billion of preferred stock

- JPMorgan Chase & Wells Fargo with debt financing

 

Great deal imo.  Although very highly levered.

 

[constructive]

I think the preferred are a great deal for Berkshire. 3G's side of the deal looks a lot less attractive.

 

The only problem is that this deal will generate too much cash! Berkshire must do more and more and more big acquisitions, or start paying a dividend sooner than anticipated.

[Palantir]

The only problem is that this deal will generate too much cash!

 

#firstworldproblems

[Guest longinvestor]

I think the preferred are a great deal for Berkshire. 3G's side of the deal looks a lot less attractive.

 

The only problem is that this deal will generate too much cash! Berkshire must do more and more and more big acquisitions, or start paying a dividend sooner than anticipated.

 

Don't forget that they want to do "10 times" the wind & solar investment ($8B) last year. Plus Lubrizol, BNI et al will use lots of captive capital. I look for them to buy another large utility or two.

[Guest wellmont]

I think the preferred are a great deal for Berkshire. 3G's side of the deal looks a lot less attractive.

 

The only problem is that this deal will generate too much cash! Berkshire must do more and more and more big acquisitions, or start paying a dividend sooner than anticipated.

 

actually I believe they are going to use the hnz vehicle to acquire. so would be surprised if the cash is upstreamed to HQ. only the pref div. in that sense he has kind of created yet another quasi warrant/pref position. the 3g side of the deal is more levered. I would actually prefer that side. :)

[fareastwarriors]

Was this posted?

 

 

WEB on CNBC this morning.

 

http://video.cnbc.com/gallery/?play=1&video=3000148043#eyJ2aWQiOiIzMDAwMTQ4MDQzIiwiZW5jVmlkIjoiUUQxMjJMT05JN0NWTmVReWREbHZ4Zz09IiwidlRhYiI6ImluZm8iLCJ2UGFnZSI6MSwiZ05hdiI6WyLCoExhdGVzdCBWaWRlbyJdLCJnU2VjdCI6IkFMTCIsImdQYWdlIjoiMSIsInN5bSI6IiIsInNlYXJjaCI6IiJ9

[txlaw]

You know, the beauty of this deal is the growth platform Heinz offers with the right management. 

 

Offering sauces and condiments ought to be a great business.  If KO gets a royalty on hydration, Heinz gets a royalty on saucing/garnishing one's foods.  Would love to see them start to acquire international sauce/condiment brands after they pay down some debt.

 

I looked into Kikkoman a couple of years ago, but decided to pass on it because who the heck knows how Japanese management behaves.

[redskin]

3G must really see areas for cost cutting or big opportunities in emerging markets.  There is a lot of leverage in this deal with $14 billion of debt put on it.  I don't know what kind of financing they will get, but lets say they pay 7% on the debt.

 

Ebitda                $2,000

Buffett preferred  (700)

Interest on debt    (980)

Pre tax profit =    $320

 

$320 million pre tax on their 8.2 billion equity investment is only 3.9%.

 

 

[Green King]

Your debt number is a little high think 50 to 75 percent of that. Based on the nature of the business also they can grow the intrinsic value by buying other would business. Possibility of more growth ahead as the world develop.

[redskin]

Your debt number is a little high think 50 to 75 percent of that. Based on the nature of the business also they can grow the intrinsic value by buying other would business. Possibility of more growth ahead as the world develop.

 

8-k that Berkshire filed yesterday afternoon said $14 billion of financing from WFC and JPM.  They also said they would rollover some existing debt that did not have a change of control clause. 

 

Berkshire 12B (preferred and equity)

3G 4B  (Equity)

Debt 14B

Total $29 Billion of the $28 billion deal.

[val740]

With the deal structure and taking it as a given that 3G has a hurdle far north of the earnings yield that will drop to the equity, it seems that taking it public down the road may be in the cards. Not Buffett's style, but who knows? He did make a point on CNBC to say that the business will not be run by Berkshire but by 3G, perhaps to allow for (and provide cover for) such a future deal. Could be completely off base, but, one thing is for sure: 3G did not do the deal for a 3-4% yield growing at 7%. Also, bear in mind that it is thought that Peltz already squeezed the low hanging fruit out of the cost structure. With the equity levered 3.5:1, the returns look pretty juicy if they can grow at a mid to high single-digit rate, which is not a pipe dream given the company's exposure to emerging markets.

[Guest wellmont]

3G must really see areas for cost cutting or big opportunities in emerging markets.  There is a lot of leverage in this deal with $14 billion of debt put on it.  I don't know what kind of financing they will get, but lets say they pay 7% on the debt.

 

Ebitda                $2,000

Buffett preferred  (700)

Interest on debt    (980)

Pre tax profit =    $320

 

$320 million pre tax on their 8.2 billion equity investment is only 3.9%.

 

it looks like almost $4b of that committed capital is a bridge financing and a revolving credit line. Fitch has this at a bit over $10b of net debt or 5 x ebitda. Not sure if fitch is counting the $1b of cash on the balance sheet.

 

first you start with a business that can operate with lots of financial leverage.

there is $5b of current debt; $1b of cash

and $7b new debt

and $8b pref

and $8.2b of new equity

so you are only beholden to the banks for around $10b.

the banks are his two best friends

and there is huge amount of financial flexibility with buffett owning the pref which can be turned off if need be (cumulative).

 

oh and don't tell anybody...keep it on the down low....but Buffett is structuring this deal to avoid paying corporate income tax! like I said. shhhhh.

 

perfect structure. there is going to be cash avail after int and cap ex and there will be cash on the balance sheet, a revolver, and an ability to turn off $700m annual pref dividend. plus it seems to be designed to work beautifully in an IFLATIONary world. They say there is no low hanging fruit in Heinz. Even if that were true, what if the Next business they buy has lots and lots of low hanging fruit? that's how 3g is going to add value.

[constructive]

Your debt number is a little high think 50 to 75 percent of that. Based on the nature of the business also they can grow the intrinsic value by buying other would business. Possibility of more growth ahead as the world develop.

 

8-k that Berkshire filed yesterday afternoon said $14 billion of financing from WFC and JPM.  They also said they would rollover some existing debt that did not have a change of control clause. 

 

Berkshire 12B (preferred and equity)

3G 4B  (Equity)

Debt 14B

Total $29 Billion of the $28 billion deal.

 

Green King was saying that 7% was too high for debt, not $14B.

 

The median BB bond has a 5.8% yield to maturity, the median B bond 7.7%.  This deal seems in that range and a 7% average rate seems a little high but not much.

[jay21]

WEB is probably getting some warrants here too:

 

http://www.sec.gov/Archives/edgar/data/1067983/000119312513060036/d487537d8k.htm

 

makes the deal even better

[rogermunibond]

http://www.alumni.hbs.edu/awards/2009/brazilians.html#lemann

 

Some good bio on the fellows at 3G

 

Jorge Paulo Lemann, A.B. 1961

Carlos A. Sicupira, OPM 9, 1984

Marcel H. Telles, OPM 10, 1985

 

Directors, Anheuser-Busch InBev

Co-Founders, Fundação Estudar

Former Partners, Banco de Investimentos Garantia S.A.

Former Partners, GP Investimentos

 

Jorge Paulo Lemann, Carlos Sicupira, and Marcel Telles have been primary figures in Brazil’s economic development for more than 30 years. The three friends and business partners have much in common: remarkable business acumen, a strong commitment to education, and world-class athleticism. In 1971, Lemann founded Banco de Investimentos Garantia and soon recruited Sicupira and Telles to join what would become the most successful investment bank in Brazil. As they acquired diverse assets, the trio transformed the Brazilian economy, opening it up to outside investors while creating stability for those at home.

 

Jorge Paulo Lemann, A.B. 1961

 

Board Member, Fundação Estudar

Chairman, Lemann Foundation

 

Jorge Paulo Lemann is the leading force behind Banco Garantia, Brazil’s most prestigious investment bank. His own commitment to hard work inspired an incentive-driven culture at Garantia, where he was a senior partner for more than 25 years before selling the firm to Credit Suisse First Boston in 1998. At Garantia and later at GP Investimentos, Lemann invested in management talent and diverse acquisitions, including a retail chain, textile manufacturers, and a brewery. He transformed the national economy, bringing access to consumer goods, jobs, and global markets to Brazil.

 

Having helped build Belgium-based Anheuser-Busch InBev into one of the world’s leading breweries, Lemann now divides his time between corporate boards, family, and educational causes, including supporting cross-cultural initiatives at Harvard. Committed to enabling young people to reach their potential, Lemann co-founded Fundação Estudar to provide scholarships for Brazilian students. He also heads a family foundation that supports education, health, the environment, and medicine in Brazil.

 

Education: A.B., Economics, Harvard College, 1961

 

On Leadership: “Create a big dream. Keep it simple, easily understood, and measured. Attract the right people who work well together. Measure results consistently. You can create, run, or improve anything with this formula.”

 

Carlos A. Sicupira, OPM 9, 1984

 

Director, Anheuser-Busch InBev

Chairman, Lojas Americanas

 

In the 1980s, early in his career at Banco Garantia, Carlos (“Beto”) Sicupira agreed to take the helm of a new acquisition, Lojas Americanas, a Rio de Janeiro department store. During his 12 years as CEO, followed by the last 16 as chairman, Sicupira has grown the concern into one of Brazil’s largest nonfood discount retailers with some 500 stores and a powerful Internet presence: Today, half of Lojas’s sales take place online.

 

In 1993, Sicupira, Jorge Paulo Lemann, and Marcel Telles, longtime business partners from Garantia, founded the private equity firm GP Investimentos, which Sicupira led for eight years. After a decade of investing and building assets in the telecom, retail, consumer goods, and railroad industries, the trio sold the partnership to their younger partners.

 

Sicupira’s remarkable contributions to the Brazilian economy are matched by his commitment to promoting education, government efficiency, and entrepreneurship in Brazil. He is the founder and a director of both Endeavor Brasil, a nonprofit that helps entrepreneurs in emerging markets, and the Brava Foundation, an organization working to improve management in Brazil’s state and local governments.

 

Earlier Education: B.A., Business Administration, Universidade Federal do Rio de Janeiro, 1970

 

On Leadership: “A good leader creates results by giving opportunities to those who are younger and better than himself and by working in the right — ethical — way.”

 

Marcel H. Telles, OPM 10, 1985

 

Director, Anheuser-Busch InBev

 

Marcel Telles joined Banco Garantia as a trainee in 1972 and immediately proved his business acumen and entrepreneurial finesse; he soon became a director of the partnership that grew into what many regard as the Goldman Sachs of Brazil.

 

In 1989, when he and partners Jorge Paulo Lemann and Carlos Sicupira gained control of one of Brazil’s largest breweries, Telles agreed to run the company. Using strategies that had proven successful as an investment banker, he dramatically expanded the scope of the firm, which under his leadership evolved into AmBev, merged with Belgium-based Interbrew to become InBev, and eventually partnered with Anheuser-Busch. Today, Telles and his original partners sit on the board of Anheuser-Busch InBev, one of the top five consumer products companies in the world.

 

Together with Lemann and Sicupira, Telles founded Fundação Estudar with the goal of helping educate the future public- and private-sector leaders of Brazil. He is founder and chairman of the Instituto Social Maria Telles, an educational foundation in Brazil, and a member of the HBS Board of Dean’s Advisors.

 

Earlier Education: B.A., Economics, Universidade Federal do Rio de Janeiro, 1973

 

On Leadership: “The most effective form of leadership — and the toughest — is leading by example.”

[Liberty]

http://www.reuters.com/article/2013/02/19/us-usa-heinz-fbi-idUSBRE91I18O20130219

[fareastwarriors]

Heinz moves closer to cementing buyout funding

 

 

 

http://www.reuters.com/article/2013/03/21/berkshire-heinz-financing-idUSL1N0CDELO20130321

[jay21]

Burger King CEO will become Heinz CEO.  Anyone familiar with him or know how he did with BK?

 

 

http://finance.yahoo.com/news/burger-king-ceo-heinz-reins-122855221.html;_ylt=Ah5TxHIuK7quQDgWrlGub.KiuYdG;_ylu=X3oDMTIxaWEyYTRjBG1pdANXaWRlIFF1b3RlcyBNb2R1bGUEcG9zAzI5BHNlYwNNZWRpYVJlY2VudFF1b3Rlc1BvcnRmb2xpb3NXaWRl;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

[twacowfca]

Burger King CEO will become Heinz CEO.  Anyone familiar with him or know how he did with BK?

 

 

http://finance.yahoo.com/news/burger-king-ceo-heinz-reins-122855221.html;_ylt=Ah5TxHIuK7quQDgWrlGub.KiuYdG;_ylu=X3oDMTIxaWEyYTRjBG1pdANXaWRlIFF1b3RlcyBNb2R1bGUEcG9zAzI5BHNlYwNNZWRpYVJlY2VudFF1b3Rlc1BvcnRmb2xpb3NXaWRl;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

 

The first thing he did at BK was cut their HQ staff in half.  Heinz departing CEO under pressure from Peltz didn't allow them to become so bloated.  Maybe the new CEO will  cut them only 40%.  :)

[jay21]

From the 10-Q:

 

"The preferred stock possesses no voting rights except as required by law or for certain matters specified in the Heinz Holding

charter. The preferred stock is entitled to dividends at 9% per annum whether or not declared, is senior in priority to the common

stock and is callable after June 7, 2016 at the liquidation value plus an applicable premium and any accrued and unpaid dividends.

Under the Heinz Holding charter and a shareholders’ agreement entered into as of the acquisition date (the “shareholders’

agreement”), after June 7, 2021, Berkshire can cause Heinz Holding to sell shares of common stock through public offerings or other

issuances (“redemption offerings”), the proceeds of which would be required to be used to redeem any outstanding shares of preferred

stock. The warrants are exercisable into approximately 46 million shares of common stock (subject to certain anti-dilution

adjustments) for one cent per share and expire on June 7, 2018. "

 

Another margin of safety!  If the company blows up, 3G will have to sell and start paying back the preferred.