Berkshire acquires Heinz for 72.5 p/s

[KCLarkin]

So we have the cost cutting

 

Does the $1.5B in synergies include the benefit from refinancing high yield debt and BRK preferred?

[Zorrofan]

So we have the cost cutting

 

Does the $1.5B in synergies include the benefit from refinancing high yield debt and BRK preferred?

 

From my understanding the savings from refinancing are in addition to the $1.5B in synergies, but i could be wrong.  My guess is 3G beats that figure either way.....

 

cheers

Zorro

[original mungerville]

Yes, my understanding is the same as Zorrofan's. Refinance savings are in addition to the 1.5 billion.

[kiwing100]

Basic model with EV/EBITDA

 

https://docs.google.com/spreadsheets/d/1B7ke-kwvXH4tE-uZ72ShrigzR5LReg6oKByJo2EC4aE/edit?usp=sharing

 

Just had a quick look - do you need to deduct the US$8 bn of 9% preferreds that Berkshire owns to arrive at the common equity value?  The prefs are at a parent company level (which was the financing vehicle for purchase of HJ Heinz - named Hawk Acquisition Intermediate Corporation I), not at the operating company level of HJ Heinz Corporation II which the 10K discloses below. 

 

http://www.sec.gov/Archives/edgar/data/1600508/000160050815000011/hnz10k122814.htm

 

On June 7, 2013, H. J. Heinz Company ("Heinz") was acquired by H.J. Heinz Holding Corporation (formerly known as Hawk Acquisition Holding Corporation) (“Parent”), a Delaware corporation controlled by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Special Situations Fund III, L.P. (“3G Capital,” and together with Berkshire Hathaway, the “Sponsors”), pursuant to the Agreement and Plan of Merger, dated February 13, 2013 (the “Merger Agreement”), as amended by the Amendment to Agreement and Plan of Merger, dated March 4, 2013 (the “Amendment”), by and among Heinz, Parent and Hawk Acquisition Sub, Inc., a Pennsylvania corporation and an indirect wholly owned subsidiary of Parent (“Merger Subsidiary”), in a transaction hereinafter referred to as the “Merger.” As a result of the Merger, Merger Subsidiary merged with and into Heinz, with Heinz surviving as a wholly owned subsidiary of H. J. Heinz Corporation II (formerly Hawk Acquisition Intermediate Corporation II) ("Holdings"), which in turn is an indirect wholly owned subsidiary of Parent. Each of the Sponsors own 425 million shares of common stock in Parent which, in turn, indirectly holds 1,000 shares of common stock in Holdings. In addition, Berkshire Hathaway has an $8.0 billion preferred stock investment in Parent which entitles it to a 9.0% annual dividend, and warrants to purchase approximately 46 million additional shares of common stock in Parent.

 

 

[tede02]

Berkshire will end up with $9.5 Billion cost basis on 320 million KRFT shares after (not receiving) the 16.5 dividend.  Looks like that stock will be worth over $20 billion and pay a decent dividend.  No mention of the preferred, but I bet it's still there earning him 9%.  Interesting deal!  He said it came about in 4 weeks.

 

I was looking at this too and listening to what Buffett said on CNBC this morning.  It basically looks like a double, DAY 1!  That certainly seems like a hell of a deal for Berkshire.

 

I think it's more like a double, Year 2.

 

Also, on the "2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. " point - there are certain brands - Philadelphia Cream cheese for example - that Kraft did not retain the International rights to.  Perhaps Mondelez will make a deal to send them back to Kraft, but there may be a few brands like Philly that can't just be plugged in to the Heinz international distribution network.

 

Good point on the 2 year double.  I'll still take it!  ;D

[original mungerville]

Basic model with EV/EBITDA

 

https://docs.google.com/spreadsheets/d/1B7ke-kwvXH4tE-uZ72ShrigzR5LReg6oKByJo2EC4aE/edit?usp=sharing

 

Some important adjustments to the quick valuation:

 

1. They have stated they plan to buy in the $8B Berkshire preferreds in 2016 (these yield 9%! - that is an after tax cost to common shareholders) using debt issuance (BBB-) of the same amount (so figure, I don't know, something like 4% pre-tax or 3% after tax for the debt for a cash savings for common shareholders of the difference 6% (ie 9% minus 3%) of $8 billion or around $500 million; this is consistent with Kraft's merger presentation where they state savings of $450 to 500 million). All that to say net debt increases from $20 billion in 2015 to $28 billion in 2016 to buy-in the Berkshire held preferreds, however there is an extra 0.5 billion going to common per year because of this planned exchange in 2016.

 

2. They are going to refi $9.5 billion of Heinz high yield debt with the same amount of investment grade debt on close of the transaction - ie H2 2015. I'll guess that is a 3% pre-tax savings or 2% savings after-tax on $9.5 billion - so $300 million pre and $200 post-tax savings respectively.

 

 

(Note: both 1 and 2 above are in addition to the announced 1.5 billion in synergy savings)

 

 

3. They are targeting $2 billion of debt pay-down in 2 years (other cash requirements will be around $2 billion required one-time to achieve the $1.5 billion in annual synergies they have planned for; also they will maintain the same dividend for the next 2 years and thereafter, plan to either maintain it or increase it). In summary, their baseline seems to indicate $28 billion in net debt by 2016 minus $2 billion for $26 billion in net debt by 2016/17.

 

4. I agree that the 2015 dividend should be included.

 

 

 

 

 

 

[original mungerville]

Basic model with EV/EBITDA

 

https://docs.google.com/spreadsheets/d/1B7ke-kwvXH4tE-uZ72ShrigzR5LReg6oKByJo2EC4aE/edit?usp=sharing

 

Just had a quick look - do you need to deduct the US$8 bn of 9% preferreds that Berkshire owns to arrive at the common equity value?  The prefs are at a parent company level (which was the financing vehicle for purchase of HJ Heinz - named Hawk Acquisition Intermediate Corporation I), not at the operating company level of HJ Heinz Corporation II which the 10K discloses below. 

 

http://www.sec.gov/Archives/edgar/data/1600508/000160050815000011/hnz10k122814.htm

 

On June 7, 2013, H. J. Heinz Company ("Heinz") was acquired by H.J. Heinz Holding Corporation (formerly known as Hawk Acquisition Holding Corporation) (“Parent”), a Delaware corporation controlled by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Special Situations Fund III, L.P. (“3G Capital,” and together with Berkshire Hathaway, the “Sponsors”), pursuant to the Agreement and Plan of Merger, dated February 13, 2013 (the “Merger Agreement”), as amended by the Amendment to Agreement and Plan of Merger, dated March 4, 2013 (the “Amendment”), by and among Heinz, Parent and Hawk Acquisition Sub, Inc., a Pennsylvania corporation and an indirect wholly owned subsidiary of Parent (“Merger Subsidiary”), in a transaction hereinafter referred to as the “Merger.” As a result of the Merger, Merger Subsidiary merged with and into Heinz, with Heinz surviving as a wholly owned subsidiary of H. J. Heinz Corporation II (formerly Hawk Acquisition Intermediate Corporation II) ("Holdings"), which in turn is an indirect wholly owned subsidiary of Parent. Each of the Sponsors own 425 million shares of common stock in Parent which, in turn, indirectly holds 1,000 shares of common stock in Holdings. In addition, Berkshire Hathaway has an $8.0 billion preferred stock investment in Parent which entitles it to a 9.0% annual dividend, and warrants to purchase approximately 46 million additional shares of common stock in Parent.

 

The short answer is "yes" - see my above post which clarifies that they intend to refinance the preferred with tax deductible debt in 2016. This means net debt would increase from $20 to 28 billion in 2016.

[Phaceliacapital]

Some important adjustments to the quick valuation:

 

1. They have stated they plan to buy in the $8B Berkshire preferreds in 2016 (these yield 9%! - that is an after tax cost to common shareholders) using debt issuance (BBB-) of the same amount (so figure, I don't know, something like 4% pre-tax or 3% after tax for the debt for a cash savings for common shareholders of the difference 6% (ie 9% minus 3%) of $8 billion or around $500 million; this is consistent with Kraft's merger presentation where they state savings of $450 to 500 million). All that to say net debt increases from $20 billion in 2015 to $28 billion in 2016 to buy-in the Berkshire held preferreds, however there is an extra 0.5 billion going to common per year because of this planned exchange in 2016.

 

2. They are going to refi $9.5 billion of Heinz high yield debt with the same amount of investment grade debt on close of the transaction - ie H2 2015. I'll guess that is a 3% pre-tax savings or 2% savings after-tax on $9.5 billion - so $300 million pre and $200 post-tax savings respectively.

 

 

(Note: both 1 and 2 above are in addition to the announced 1.5 billion in synergy savings)

 

 

3. They are targeting $2 billion of debt pay-down in 2 years (other cash requirements will be around $2 billion required one-time to achieve the $1.5 billion in annual synergies they have planned for; also they will maintain the same dividend for the next 2 years and thereafter, plan to either maintain it or increase it). In summary, their baseline seems to indicate $28 billion in net debt by 2016 minus $2 billion for $26 billion in net debt by 2016/17.

 

4. I agree that the 2015 dividend should be included.

 

Yes I agree.

 

Points 1 & 2 however are difficult to model from an EV/EBITDA perspective. I included both 3 & 4, there is a debt pay down assumption and a dividend growth rate.

 

I also redid the Heinz valuation, I guess the implied Heinz equity stub is around 31 bn?

[gfp]

"1. They have stated they plan to buy in the $8B Berkshire preferreds in 2016 (these yield 9%! - that is an after tax cost to common shareholders) using debt issuance (BBB-) of the same amount (so figure, I don't know, something like 4% pre-tax or 3% after tax for the debt for a cash savings for common shareholders of the difference 6% (ie 9% minus 3%) of $8 billion or around $500 million; this is consistent with Kraft's merger presentation where they state savings of $450 to 500 million). All that to say net debt increases from $20 billion in 2015 to $28 billion in 2016 to buy-in the Berkshire held preferreds, however there is an extra 0.5 billion going to common per year because of this planned exchange in 2016."

 

-

 

One thing to remember is that there will be a premium to redeem these preferred shares at their earliest possible date.  Prior deals indicate it could be 10-20%.  Lets say 10% since 3G are friends, but that is still another $800 million to BRK up front.  It could very well be a higher premium, as they usually decline over time and this is the first call opportunity (2016).

 

It's probably safe to model $9 billion in borrowings to replace the $8 billion in BRK pref.

[Liberty]

http://brooklyninvestor.blogspot.ca/2015/03/kraft-heinz.html

[Phaceliacapital]

Taking a step back from the financials and valuation, you have to admit it's quite impressive (to say the least) what these guys are building.. Heinz is the ideal platform for Kraft brands when Mondelez loses several of the trademark rights in the next couple of years. They don't have to build shit in other regions, it's almost a question of "plug & play" into Heinz's distribution networks.

 

GE of consumer goods.

[petec]

Taking a step back from the financials and valuation, you have to admit it's quite impressive (to say the least) what these guys are building.. Heinz is the ideal platform for Kraft brands when Mondelez loses several of the trademark rights in the next couple of years. They don't have to build shit in other regions, it's almost a question of "plug & play" into Heinz's distribution networks.

 

GE of consumer goods.

 

+1

 

I'd buy it just for who they are if there weren't now 3 listed entities with 3G behind them.  Hard to know where the next deal gets done - I wish there was only one, and it was explicitly their acquisition vehicle!

[Liberty]

I'd buy it just for who they are if there weren't now 3 listed entities with 3G behind them.  Hard to know where the next deal gets done - I wish there was only one, and it was explicitly their acquisition vehicle!

 

It would indeed be simpler, but this would be one heck of a big vehicle. The way they're going now, soon they'll have a Malone-like constellation of entities. If you want it all, you can always just buy a basket, or pick those that have a profile that you prefer. Not a bad deal.

[Guest longinvestor]

For BRK, there is the possibility of 100% ownership of HNZ-KFT, TH-BK when 3G exits.

[original mungerville]

Share price rising 5% today. Any news?

 

Or is it indexers and closet-indexers having to buy more given Heinz portion is effectively going public creating a larger market cap of the new Kraft-Heinz?

[Shane]

I think the market is just assigning the value of the cost savings to KRFT.  I bought a ton yesterday morning.  The stock had barely moved if you back out the $16.5 from the share price... seemed like a no-brainer that it would continue to climb for the next few days.

 

Adding Heinz's adjusted earnings and KRFT's adjusted earnings and multiplying by 49%... it was trading at maybe 16x earnings yesterday ex-dividend!

[Liberty]

http://brooklyninvestor.blogspot.ca/2015/03/zero-based-budgeting-book.html

[KCLarkin]

It can't be indexers. It is way too early and the indexes are float adjusted. The market will have a hard time valuing this since Heinz is a private company so it will likely bounce around a lot. The stock probably deserves a 3G and Buffett premium.

 

I made this a 3.5% position on Tuesday. Oddly, I looked in our fridge and pantry and I can't find a single Heinz or Kraft brand.

 

[Shane]

Why will the market have a hard time valuing the business?  Heinz's annual reports are current (Hawk Acquisition Intermediate Corp II)... everything is there that we need.

[Grenville]

"1. They have stated they plan to buy in the $8B Berkshire preferreds in 2016 (these yield 9%! - that is an after tax cost to common shareholders) using debt issuance (BBB-) of the same amount (so figure, I don't know, something like 4% pre-tax or 3% after tax for the debt for a cash savings for common shareholders of the difference 6% (ie 9% minus 3%) of $8 billion or around $500 million; this is consistent with Kraft's merger presentation where they state savings of $450 to 500 million). All that to say net debt increases from $20 billion in 2015 to $28 billion in 2016 to buy-in the Berkshire held preferreds, however there is an extra 0.5 billion going to common per year because of this planned exchange in 2016."

 

-

 

One thing to remember is that there will be a premium to redeem these preferred shares at their earliest possible date.  Prior deals indicate it could be 10-20%.  Lets say 10% since 3G are friends, but that is still another $800 million to BRK up front.  It could very well be a higher premium, as they usually decline over time and this is the first call opportunity (2016).

 

It's probably safe to model $9 billion in borrowings to replace the $8 billion in BRK pref.

 

From Heinz:

Heinz expects to refinance the Preferred Stock at its first call date in June 2016 with the proceeds of new debt and cash on hand. There will be a 4% premium on the repayment, and interest on debt used to refinance the Preferred Stock will be deducted in calculating Adjusted Net Income. The after-tax cost to repay the Preferred Stock will be approximately $210.8 Million or 2.48%.

[KCLarkin]

Why will the market have a hard time valuing the business?  Heinz's annual reports are current (Hawk Acquisition Intermediate Corp II)... everything is there that we need.

 

What is a fair multiple for Kraft Heinz (P/E or EV/EBITDA)?

[Shane]

KCLarkin - that question can only be answered in retrospect.  Without being facetious... It is easy to estimate the current going rate using comps, no?

 

Or you can at least ascribe the Kraft without sales growth multiple to the Kraft/Heinz with growth and better liquidity ratios combined company.

 

The answer is... The fair multiple is just as hard to land on with or without Heinz being public.

 

Regardless the company is worth more today with the synergies announced and better growth platform.

[Phaceliacapital]

For cons goods in this sector I would reckon anywhere between 10 - 14x EV/EBITDA.

 

P/E around 22-24ish??

[Shane]

I'd agree! And I'd adjust for true earnings of Heinz and back out the dividend if acquiring KRFT.  Then adding in the finance savings/synergies (if you believe it) and voila.  Multiply by .49 and your close to a good estimate of KRFT shareholder's share of earnings post merger.  At least that's how I think of it.

[KCLarkin]

The fair multiple is just as hard to land on with or without Heinz being public.

 

No, if Heinz was public the market would give you the multiple that it thought was fair. If you think 10-14x is a fair range, that is 17% plus or minus. And that assumes that the market agrees on the earnings power of the combined company. So let's say $65-100 is fair value.