Friday, February 15, 2013

It’s Good To Be Warren Buffet: The Heinz Deal


It’s Good To Be Warren Buffet:  The Heinz Deal

Berkshire Hathaway and 3G, a Brazilian private equity firm, have joined forces to acquire Heinz (NYSE: HNZ) for $72.50 per share in cash.  The stock is trading at the acquisition price, suggesting that the ultimate price may be slightly higher.  This transaction looks like a classic Warren Buffet deal.  I’m guessing that Mr. Buffet will wind up acquiring Heinz in a series of comfortable bites over the next several years.

While the headlines feature the $23 billion purchase price, Berkshire Hathaway is only putting up $4 billion in equity.  This is only about 1.5% of Berkshire Hathaway’s market cap.  With Heinz trading at an all-time high, Berkshire is carefully managing the risk of the deal.   In a few years, they will probably buyout 3G’s $4 billion investment, and add Heinz to their portfolio of companies. 
Restructuring a Money Manager (2010)

Meanwhile, they'll earn income some $720 million per year on $8 billion in preferred equity that Berkshire Hathaway is also investing in the deal.    In a world, where we’re all looking for income, Mr. Buffet appears to have scored a 9% preferred.  True, Heinz will be saddled with $12 billion in debt, an increase of $7 billion over the existing level of debt at Heinz.  The company operates in stable businesses, and generates about $1.5 billion in cash flow ($550 million of free cash flow), that should service the debt.

Since 3G, the owner of Burger King, is going to manage the investment, Mr. Buffet can keep his hands clean as 3G goes through the process of cutting expenses, and generating the savings necessary to make this deal work.   When the surgery has been completed, a sleeker Heinz will probably be added to Berkshire Hathaway stable.  It will fit in nicely with the likes of International Dairy Queen, Clayton Homes, Net Jets, and Benjamin Moore.

Given Mr. Buffet's love of cheeseburgers, the acquisition of Heinz ketchup is a logical move.

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