Berkshire acquires Heinz for 72.5 p/s

[jay21]

 

Maybe now you could say, hey he made his 50% he should sell. Well its not that simple because a) he publicly committed to the deal which is part of the rise in value of the stock of newco, and b) he would have huge capital gains now (ie he owns half of $42 billion or $21 billion on an investment of $4.5 originally for Heinz common plus his $5 billion contribution to the one time dividend; so his capital gain would be $21 billion - $9.5 billion or $11.5 billion; 20% tax on that would be 2.2 billion.

 

So, how far do you want to take the "Buffett is going to get a good return so I am" argument based on these numbers?

 

He did sell  (somewhat). He used his inflated HNZ equity to buy reasonably priced KRFT equity. Maybe?

[original mungerville]

 

Maybe now you could say, hey he made his 50% he should sell. Well its not that simple because a) he publicly committed to the deal which is part of the rise in value of the stock of newco, and b) he would have huge capital gains now (ie he owns half of $42 billion or $21 billion on an investment of $4.5 originally for Heinz common plus his $5 billion contribution to the one time dividend; so his capital gain would be $21 billion - $9.5 billion or $11.5 billion; 20% tax on that would be 2.2 billion.

 

So, how far do you want to take the "Buffett is going to get a good return so I am" argument based on these numbers?

 

He did sell  (somewhat). He used his inflated HNZ equity to buy reasonably priced KRFT equity. Maybe?

 

I don't think he looks at it like he sold Heinz at all. I think he figured adding $10 billion in equity plus Heinz to merge with Kraft was a value creating opportunity relative to Heinz stand-alone because 1) it permits 3G to cut $1.5 billion from Kraft costs, 2) allows Heinz to refinance its debt to investment grade, and 3) provides more product for Heinz's global distribution system to push through.

 

[sleepydragon]

 

Maybe now you could say, hey he made his 50% he should sell. Well its not that simple because a) he publicly committed to the deal which is part of the rise in value of the stock of newco, and b) he would have huge capital gains now (ie he owns half of $42 billion or $21 billion on an investment of $4.5 originally for Heinz common plus his $5 billion contribution to the one time dividend; so his capital gain would be $21 billion - $9.5 billion or $11.5 billion; 20% tax on that would be 2.2 billion.

 

So, how far do you want to take the "Buffett is going to get a good return so I am" argument based on these numbers?

 

He did sell  (somewhat). He used his inflated HNZ equity to buy reasonably priced KRFT equity. Maybe?

 

I don't think he looks at it like he sold Heinz at all. I think he figured adding $10 billion in equity plus Heinz to merge with Kraft was a value creating opportunity relative to Heinz stand-alone because 1) it permits 3G to cut $1.5 billion from Kraft costs, 2) allows Heinz to refinance its debt to investment grade, and 3) provides more product for Heinz's global distribution system to push through.

 

I will add if he wanted to sell, he won't use the cash dividends. he would have used all stocks. he/3G essentially paid for all the premium without diluting his current Heinz stock.

[james22]

Thought experiment: how would this "merger" have been reported if you swapped the popular, cuddly Warren Buffet with Gordon Gekko?

 

No-doubt critics would have recalled his audacious acquisition of Heinz two years ago. Next the sad tales of fired workers and shuttered factories in order to recoup the 40 per cent he paid above the decade average sector ev/ebitda multiple. Having squeezed Heinz's ebitda margin to 28 per cent (the global sector average margin is just 11 per cent) the story turns to Gordon's attack on Kraft. Goosed earnings on a 14 times multiple unfairly justifies taking control of the merged company (Kraft makes almost twice the revenues and more profit). Questions would have swirled around the sustainability of Heinz's opex cuts and the fate of Kraft's 22,000 employees.

 

But it's Warren, not Gordon — so such a narrative is unimaginable.

 

http://www.businessinsider.com/warren-buffett-gordon-gekko-comparison-2015-3

[Jurgis]

There are a lot of things we support or like when Buffett/Munger do them, but not when others do it. There is definitely some hypocrisy in their actions and words.

[wachtwoord]

I love Gordon Gekko  :)

[Jurgis]

I love Gordon Gekko  :)

 

I prefer Darien Taylor...

 

but

 

Greed is good.  8)  :P  :-X  ::)

[Liberty]

There are a lot of things we support or like when Buffett/Munger do them, but not when others do it. There is definitely some hypocrisy in their actions and words.

 

Either that, or people pretend that A and B are the same thing when they aren't, or that what Buffett and Munger said were blanket statements without any possible exceptions.

 

ie. It's perfectly fine to say that most derivatives are dangerous because people don't know what they're doing, don't know what their real exposure is, etc.. And then have Buffett use derivatives that he understands, where he knows what his exposure and risk is, etc.

 

It's not contradictory.

 

It's people who only remember the soundbites ("derivatives are weapons of mass destruction") rather than the actual more subtle arguments that were made in a certain context, at a certain time, or in answer to a specific question.

 

Same with Buffett and Munger saying bad things about the PE industry, because yes, in general is has a set of incentives that make it pretty bad for long-term value creation and risk control. But that doesn't mean that there can't be exceptions. Do you think Munger and Buffett would say that their statements were about every single PE firm in existence?

 

3G is PE, but they seem to be pretty long-term oriented and to think like owners. How are the businesses they've owned for a long time doing (and what does that tell you about how they are investing and cutting? Is it possible that they are really good at finding actual waste to cut - and that they pick businesses that they know have ton of it to cut - and still invest in the core business?)? How often do they flip things compared to most PE? How do they protect their downside?

 

Buffett's a pretty smart guy. If you asked him about his comments on PE and 3G, I doubt he'd say "oh, you caught me". He might say that his problem is with a lot of PE practices, and that 3G doesn't have those. And it's not because he doesn't have the stomach to do big restructuring himself that it's something that should never be done and that you can't strengthen a business that has grown soft and fat over time. People assume that because Buffett doesn't like to do certain things, that he would be against them in all situations in the abstract...

[Jurgis]

Yeah, Liberty, but you and others argue the opposite of what you said here on VRX thread. ;)

 

Of course, I guess I also argue the opposite to what I said here on VRX thread. ;)

 

....

 

Edit: In general, I don't give a ^*&( much. I still think that Buffett's integrity is overrated, but I'm fine with it, since he's a human and he can hold contradictory opinions at the same time and rationalize why they are fine...

[Guest longinvestor]

There are a lot of things we support or like when Buffett/Munger do them, but not when others do it. There is definitely some hypocrisy in their actions and words.

 

Either that, or people pretend that A and B are the same thing when they aren't, or that what Buffett and Munger said were blanket statements without any possible exceptions.

 

ie. It's perfectly fine to say that most derivatives are dangerous because people don't know what they're doing, don't know what their real exposure is, etc.. And then have Buffett use derivatives that he understands, where he knows what his exposure and risk is, etc.

 

It's not contradictory.

 

It's people who only remember the soundbites ("derivatives are weapons of mass destruction") rather than the actual more subtle arguments that were made in a certain context, at a certain time, or in answer to a specific question.

 

Same with Buffett and Munger saying bad things about the PE industry, because yes, in general is has a set of incentives that make it pretty bad for long-term value creation and risk control. But that doesn't mean that there can't be exceptions. Do you think Munger and Buffett would say that their statements were about every single PE firm in existence?

 

3G is PE, but they seem to be pretty long-term oriented and to think like owners. How are the businesses they've owned for a long time doing (and what does that tell you about how they are investing and cutting? Is it possible that they are really good at finding actual waste to cut - and that they pick businesses that they know have ton of it to cut - and still invest in the core business?)? How often do they flip things compared to most PE? How do they protect their downside?

 

While on the topic of PE, here is an article in WSJ today.

 

http://www.wsj.com/articles/andy-kessler-the-glory-days-of-private-equity-are-over-1427661933?mod=WSJ_hpp_sections_opinion

 

The Swensen model is the dominant theme. Five reasons calling for the gradual demise of PE mentioned in the article, the final reason private equity is done: It is fresh out of fat targets.

 

This is great for BRK in two ways.

1. Competition for deals thins out.

2. As PE firms atrophy, Berkshire will likely see more opportunities to buy biz's, where PE is done wringing out what they can from a biz allowing for BRK to come in, remove the debt anchor and nurse the franchise value back to life. This just happened at Burger King. More certain to come. Because PE and extreme debt load go together. Only thing to verify is if the PE ownership took the life-blood out of the original franchise value. Thank goodness they have a holding time horizon of 3 to 5 years only, not longer!

 

 

[Liberty]

Yeah, Liberty, but you and others argue the opposite of what you said here on VRX thread. ;)

 

Of course, I guess I also argue the opposite to what I said here on VRX thread. ;)

 

....

 

Edit: In general, I don't give a ^*&( much. I still think that Buffett's integrity is overrated, but I'm fine with it, since he's a human and he can hold contradictory opinions at the same time and rationalize why they are fine...

 

How is it opposite?

[loganc]

2. As PE firms atrophy, Berkshire will likely see more opportunities to buy biz's, where PE is done wringing out what they can from a biz allowing for BRK to come in, remove the debt anchor and nurse the franchise value back to life. This just happened at Burger King. More certain to come. Because PE and extreme debt load go together. Only thing to verify is if the PE ownership took the life-blood out of the original franchise value. Thank goodness they have a holding time horizon of 3 to 5 years only, not longer!

 

I am am quite sure 3G bought Burger King in a pretty leveraged transaction and then the business de-levered over time as the business performance improved via cost cutting, re-franchising, and the master franchise joint venture growth model.  The BKW-THI is also pretty leveraged via the BRK preferred.

 

Also, in terms of the VRX thread thing.  I am pretty sure Liberty never made the comparison and that I was the one that made the comment.  In my mind, there is very little difference between the VRX model and the 3G model.  For what it is worth, I would imagine that the two largest shareholders of VRX would probably make similar comments.

 

 

[Guest longinvestor]

2. As PE firms atrophy, Berkshire will likely see more opportunities to buy biz's, where PE is done wringing out what they can from a biz allowing for BRK to come in, remove the debt anchor and nurse the franchise value back to life. This just happened at Burger King. More certain to come. Because PE and extreme debt load go together. Only thing to verify is if the PE ownership took the life-blood out of the original franchise value. Thank goodness they have a holding time horizon of 3 to 5 years only, not longer!

 

I am am quite sure 3G bought Burger King in a pretty leveraged transaction and then the business de-levered over time as the business performance improved via cost cutting, re-franchising, and the master franchise joint venture growth model. The BKW-THI is also pretty leveraged via the BRK preferred.

 

 

 

Also, in terms of the VRX thread thing.  I am pretty sure Liberty never made the comparison and that I was the one that made the comment.  In my mind, there is very little difference between the VRX model and the 3G model.  For what it is worth, I would imagine that the two largest shareholders of VRX would probably make similar comments.

 

hmmm.... to set the record straight, Burger King has had the %^&* blessing of PE ownership for a long time. Since 2002, to be exact. TPG+GS+Bain Capital. The PE vultures have been circling BK for a while, again and again.

http://www.wsj.com/articles/SB10001424052748703882304575466013657192240

http://blogs.ft.com/businessblog/2010/09/the-private-equity-industry-rehashes-burger-king/

http://www.forbes.com/sites/caroltice/2012/06/22/why-burger-king-will-soon-go-private-again/

 

The script is always the same, strip the cash out via dividends, choke out investments (in this case, the single biggest complaint from franchisees had been not enough brand marketing dollars from corporate during 2002-07). The WSJ article shows what that did to BK vis a vis MCD. What BK needed was time to turn it around, Wall Street is not interested in that kind of time commitment and 3G/BRK is.

 

As to the 9% preferred, banks were not lining up to fund BK's debt....again thanks to the $3B of straight debt loaded onto it's balance sheet, courtesy of several rounds of PE ownership

 

http://blogs.wsj.com/moneybeat/2014/09/03/why-burger-king-is-paying-9-for-warren-buffetts-blessing/

 

In a market flooded with low-interest financing, why go to Warren Buffett and pay a 9% interest rate?

 

That’s exactly what Burger King Worldwide Inc. and its owner 3G Capital Management did last week when they were looking to finance their $11 billion purchase of Tim Hortons Inc. Mr. Buffett’s Berkshire Hathaway Inc. is putting $3 billion into the deal in the form of preferred shares with 9% coupon.

 

In addition to Mr. Buffett’s $3 billion check, 3G has said it will pay $1.2 billion in cash. J.P. Morgan Chase & Co. and Wells Fargo & Co. have promised to help the company raise another $9.5 billion in the debt markets.

 

But in a period when the yield on corporate junk bonds hover around 5.27%, it may seem like 3G could have found a cheaper source of financing than Berkshire.

 

But to get the deal done, with the amount of debt 3G put on the company, Mr. Buffett was ultimately the best option.

 

After being bought and sold a few times over the past 15 years, Burger King is a highly indebted company with nearly $3 billion of debt on its balance sheet. The burger chain is paying interest rates of between 9.875% and 11% on roughly $1.3 billion of its debt.

 

So 9% is actually a step down in interest payments on more debt.

 

Importantly, by structuring Mr. Buffett’s piece of the financing equation as preferred equity, Burger King will avoid carrying the $3 billion as debt on its balance sheet. That means the new company’s debt load will be roughly five times its earnings rather than seven times if it was pure debt.

 

While Moody’s has said it is reviewing the company’s new structure for a possible downgrade, analysts think the new Burger King-Tim Hortons will hold a higher rating, though still in junk territory, with the proposed capital structure of the deal.

 

Burger King had another reason to turn to preferred shares to help finance the transaction: It’s unlikely a bank would be willing to finance the deal if the leverage ratio climbed above six times.

 

 

 

[loganc]

I am not sure what your point is on BK.  I understand the general idea that PE firms can load a company with a bunch of debt, cut costs to the bone, and impair a business.  My point is that 3G bought BK with a lot of debt and they have subsequently made vast improvements in the business operation.

 

Then you said something about BRK coming in and removing a "debt anchor" from Burger King and nursing the franchise.  It seems to me that BRK provided financing via a preferred (i.e. additional leverage) to the THI deal.

 

 

[Guest longinvestor]

I am not sure what your point is on BK.  I understand the general idea that PE firms can load a company with a bunch of debt, cut costs to the bone, and impair a business.  My point is that 3G bought BK with a lot of debt and they have subsequently made vast improvements in the business operation.

 

Then you said something about BRK coming in and removing a "debt anchor" from Burger King and nursing the franchise.  It seems to me that BRK provided financing via a preferred (i.e. additional leverage) to the THI deal.

 

The preferred improved the capital structure of BK by decreasing the debt ratio to a respectable 5 through the preferred versus 7 with the straight debt before the deal. So, it is deleveraging. The $3B of debt bearing interest rates of 9.75% to 11% sounds like an anchor to me, no? Was all of the debt 3G's doing? Not.

 

Time will tell, but the 3G/BRK deal here has started the nursing of BK's franchise value back by allowing them to once again compete with MCD and Wendy's.  Something that PE ownership of BK did not deliver on for over 12 years.

 

I would love for Buffett to talk about the BK deal it in his own words, fully expect it to be along these lines.

[loganc]

I am not sure what your point is on BK.  I understand the general idea that PE firms can load a company with a bunch of debt, cut costs to the bone, and impair a business.  My point is that 3G bought BK with a lot of debt and they have subsequently made vast improvements in the business operation.

 

Then you said something about BRK coming in and removing a "debt anchor" from Burger King and nursing the franchise.  It seems to me that BRK provided financing via a preferred (i.e. additional leverage) to the THI deal.

 

The preferred improved the capital structure of BK by decreasing the debt ratio to a respectable 5 through the preferred versus 7 with the straight debt before the deal. The $3B of debt bearing interest rates of 9.75% to 11% sounds like an anchor to me, no? Was all of the debt 3G's doing? Not.

 

I would have to go back and look specifically, but 3G purchased BK at a 4B EV with 2.8B of debt financing in 2010.  It would appear at that point in time BK had about 800MM of debt.  So, obviously, 3G did load BK with debt at that point.  I can't say whether the 800MM was refinanced in 2010, but it seems likely that it would have been due to change of control provisions.

 

The 2.8B of debt that 3G used to purchase BKW had quite an onerous weighted average interest rate and they could not refinance earlier due to some costly make whole provisions.  That were at the point where they could have refinance the debt at a reasonable cost just prior to doing the THI deal.  It was actually expected and somewhat telegraphed to BKW shareholders from management that they were planning to do a dividend recap.  However, it appears that they found the THI transaction to be much more attractive.  I am pretty familiar with BKW as I have been a shareholder for the past 1.5 years. 

[loganc]

Time will tell, but the 3G/BRK deal here has started the nursing of BK's franchise value back by allowing them to once again compete with MCD and Wendy's.  Something that PE ownership of BK did not deliver on for over 12 years.

 

To be fair, I think 3G has done a pretty good job of nursing back the value the BK franchise and growing the business without the help from BRK.  Buffett actually passed on investing in the deal in 2010.  That was obviously a mistake as the returns from that transaction have been quite substantial.

[Guest longinvestor]

Time will tell, but the 3G/BRK deal here has started the nursing of BK's franchise value back by allowing them to once again compete with MCD and Wendy's.  Something that PE ownership of BK did not deliver on for over 12 years.

 

To be fair, I think 3G has done a pretty good job of nursing back the value the BK franchise and growing the business without the help from BRK.  Buffett actually passed on investing in the deal in 2010.  That was obviously a mistake as the returns from that transaction have been quite substantial.

 

Looks like you have followed this for longer than I have. Find your comment of BRK passing on BK in 2010 interesting. Don't know if it had to do with how bad it was at BK at that time. Seeing the good things happening at BK perhaps brought newfound love at Omaha for 3G. Leading to Heinz, Kraft and the new BK?

 

I do however expect BRK to own a larger chunk of the biz in the coming years, especially as 3G works their operational magic with TH-BK. Buffett has regretted not participating in MCD for a long time, this appears to be his way into the fast food world to make up for his error of omission. 

 

3G has gotta be very big on BRK's partnership radar. Besides, 3G is a PE firm after all, albeit with a longer time horizon. But not permanent. That's where BRK comes in. These deals must be mouth watering for Buffett. 

 

[loganc]

Don't know if it had to do with how bad it was at BK at that time. Seeing the good things happening at BK perhaps brought newfound love at Omaha for 3G. Leading to Heinz, Kraft and the new BK?

 

I do however expect BRK to own a larger chunk of the biz in the coming years, especially as 3G works their operational magic with TH-BK. Buffett has regretted not participating in MCD for a long time, this appears to be his way into the fast food world to make up for his error of omission. 

 

3G has gotta be very big on BRK's partnership radar. Besides, 3G is a PE firm after all, albeit with a longer time horizon. But not permanent. That's where BRK comes in. These deals must be mouth watering for Buffett.

 

No idea why he passed on it in 2010.  I guess it would have been a pretty small investment for BRK at that time, so maybe that has something to do with it.  I recall him mentioning passing on the initial deal during an interview on CNBC which happened around the time of the THI deal.  No idea whether BRK ends up with significantly more of QSR or not.  It certainly doesn't seem outside the realm of possibility.  I would say that Buffett has been blown away by the progress at HNZ and I am sure he is really excited about the KRFT deal. 

[loganc]

Buffett's a pretty smart guy. If you asked him about his comments on PE and 3G, I doubt he'd say "oh, you caught me". He might say that his problem is with a lot of PE practices, and that 3G doesn't have those. And it's not because he doesn't have the stomach to do big restructuring himself that it's something that should never be done and that you can't strengthen a business that has grown soft and fat over time. People assume that because Buffett doesn't like to do certain things, that he would be against them in all situations in the abstract...

 

I kind of derailed this thread by talking specifically about BKW/QSR, but I wanted to address the above comment by Liberty because I think it is important.

 

So, Buffett has been asked the direct question comparing 3G to "private equity" (from Becky Quick) and his response was along the lines of what Liberty says - (paraphrasing) "the difference between 3G and private equity is that 3G holds for keeps and private equity has a short term horizon and is looking to flip the asset." 

 

What Buffett said (and what many have said in this thread about the short term thinking of private equity) is absolutely true.  However, I don't think the culprit is really the private equity general partners.  In other words, I think the true criticism should be geared towards the short term thinking of the limited partner investors in the private equity funds that force exits from investments on a specific time frame.  The perceived "flipping of companies" could very likely be explained by the selling of assets to return capital to the limited partners on the specific time frame that is demanded from the limited partners. 

 

Ultimately, I think it is a gross oversimplification to place all of the blame of "short termism" on the private equity investors, when the private equity industry in general does not have access to permanent capital and must therefore return capital on a strict time frame.  I think this particular dynamic is worth thinking about.

[Guest longinvestor]

Buffett's a pretty smart guy. If you asked him about his comments on PE and 3G, I doubt he'd say "oh, you caught me". He might say that his problem is with a lot of PE practices, and that 3G doesn't have those. And it's not because he doesn't have the stomach to do big restructuring himself that it's something that should never be done and that you can't strengthen a business that has grown soft and fat over time. People assume that because Buffett doesn't like to do certain things, that he would be against them in all situations in the abstract...

 

I kind of derailed this thread by talking specifically about BKW/QSR, but I wanted to address the above comment by Liberty because I think it is important.

 

So, Buffett has been asked the direct question comparing 3G to "private equity" (from Becky Quick) and his response was along the lines of what Liberty says - (paraphrasing) "the difference between 3G and private equity is that 3G holds for keeps and private equity has a short term horizon and is looking to flip the asset." 

 

What Buffett said (and what many have said in this thread about the short term thinking of private equity) is absolutely true.  However, I don't think the culprit is really the private equity general partners.  In other words, I think the true criticism should be geared towards the short term thinking of the limited partner investors in the private equity funds that force exits from investments on a specific time frame.  The perceived "flipping of companies" could very likely be explained by the selling of assets to return capital to the limited partners on the specific time frame that is demanded from the limited partners. 

 

Ultimately, I think it is a gross oversimplification to place all of the blame of "short termism" on the private equity investors, when the private equity industry in general does not have access to permanent capital and must therefore return capital on a strict time frame.  I think this particular dynamic is worth thinking about.

 

While I agree that simple explanations are being offered in this discussion, given that PE ownership (GP+LP) is being contrasted with the BRK ownership (Omaha+SH), the following themes frame the discussion,

 

1) Substantially O-P-M

2) Overly generous fee structure, 2 & 20

 

The LP's demand for quick return of capital is amply understandable given 1 and 2 above, no? 

 

Buffett's "Fees generating investments versus investments generating fees" best captures it.

 

 

 

[VersaillesinNY]

Wharton Power Hour with Eduardo Luz, Zone President for Heinz North America

 

[Guest longinvestor]

http://www.bizjournals.com/pittsburgh/news/2015/04/17/nestle-chairman-heinz-owners-have-pulverized-the.html?ana=yahoo

 

Interesting times for mega brands in the consumer world. IMO, instead of picking a bone with Kraft-Heinz, everyone needs to figure out how mega brands can coexist in the wake of rising store-brands. From Great Value to Sam's Choice to Kirkland to everything in between like Osco, Roundy's. The fight for shelf space and shrinking disposable incomes makes it tough for everyone. Cost cutting is not optional. 

[gfp]

Here is a filing that shows the adjusted EBITDA numbers that 3G / Heinz uses in thinking about Kraft.  Looks like this deal will close shortly after the shareholder vote.

 

http://www.sec.gov/Archives/edgar/data/1545158/000119312515224426/0001193125-15-224426-index.htm

 

Another filing shows adjusted EBITDA numbers that 3G uses for Heinz:

 

http://www.sec.gov/Archives/edgar/data/1600508/000119312515224925/d944946dex991.htm

[Phaceliacapital]

Thanks!