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Heinz acquisition could be a prelude to more deals Heinz acquisition could be a prelude to more deals
(7 months later)
"We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy." So said Warren Buffett in a letter to his Berkshire Hathaway shareholders two years ago. The surprise is that he's waited so long to spend some of Berkshire's excess cash. His last big plunge – the purchase of railway company Burlington Northern Santa Fe for $26.5bn – was completed in 2010."We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy." So said Warren Buffett in a letter to his Berkshire Hathaway shareholders two years ago. The surprise is that he's waited so long to spend some of Berkshire's excess cash. His last big plunge – the purchase of railway company Burlington Northern Santa Fe for $26.5bn – was completed in 2010.
Heinz is a classic Buffett target. The company makes everyday products, has strong and stable profit margins and is a great American brand that has been around for more than a century. In those respects, it looks like Gillette, one of Buffett's most famous successes: a buy-and-hold investment in which the steady compounding of returns over many years does the hard work.Heinz is a classic Buffett target. The company makes everyday products, has strong and stable profit margins and is a great American brand that has been around for more than a century. In those respects, it looks like Gillette, one of Buffett's most famous successes: a buy-and-hold investment in which the steady compounding of returns over many years does the hard work.
So far, so traditional for Buffett. In other ways, however, this deal is very different. For a start, it could be the start of a relationship between Berkshire and 3G Capital, the Brazilian private equity fund that is the partner on the deal. Buffett was falling over himself to heap praise on 3G leading light Jorge Paulo Lemann. 3G's prime creation is AB InBev, the giant brewer that was assembled via a string of bigger and bigger acquisitions. Could bagging Heinz also be a prelude to more deals? "I would hope that over time we would be adding to this," said Buffett. That sounds like more than a hint.So far, so traditional for Buffett. In other ways, however, this deal is very different. For a start, it could be the start of a relationship between Berkshire and 3G Capital, the Brazilian private equity fund that is the partner on the deal. Buffett was falling over himself to heap praise on 3G leading light Jorge Paulo Lemann. 3G's prime creation is AB InBev, the giant brewer that was assembled via a string of bigger and bigger acquisitions. Could bagging Heinz also be a prelude to more deals? "I would hope that over time we would be adding to this," said Buffett. That sounds like more than a hint.
Indeed, it could be argued that the price for this acquisition makes more sense if more purchases follow. At $72.50 a share, Berkshire and 3G are paying 20 times Heinz's earnings last year, which is expensive by historical standards in the food industry. Nor have Heinz's virtues been a secret – a better time to invest was probably several years ago, when activist investor Nelson Peltz started to hammer away to encourage Heinz to raise its game. But, if Heinz is merely step one in a grander plan, the wisdom of paying 20 times earnings is best judged once other pieces of the jigsaw have fallen into place.Indeed, it could be argued that the price for this acquisition makes more sense if more purchases follow. At $72.50 a share, Berkshire and 3G are paying 20 times Heinz's earnings last year, which is expensive by historical standards in the food industry. Nor have Heinz's virtues been a secret – a better time to invest was probably several years ago, when activist investor Nelson Peltz started to hammer away to encourage Heinz to raise its game. But, if Heinz is merely step one in a grander plan, the wisdom of paying 20 times earnings is best judged once other pieces of the jigsaw have fallen into place.
All of which makes sombre news for fans of public stock markets. Heinz chief executive William Johnson was correct to say that the firm is being bought "from a position of strength," at an all-time high for the share price and that the board had little choice but to offer a recommendation. But what is it that Heinz, which has been a quoted company since 1946, can do in the private arena that it couldn't do in the public?All of which makes sombre news for fans of public stock markets. Heinz chief executive William Johnson was correct to say that the firm is being bought "from a position of strength," at an all-time high for the share price and that the board had little choice but to offer a recommendation. But what is it that Heinz, which has been a quoted company since 1946, can do in the private arena that it couldn't do in the public?
From a purely operational point of view, almost nothing. But, from a financial point of view, Heinz's balance sheet can now be injected with more debt to spice up returns. Note that Buffett, along with $4bn plain-vanilla equity, is also contributing $8bn via preferred shares that will carry a high-interest coupon. It would be hard for Heinz, as a public company obliged to fund itself relatively conservatively, to copy that model. Private equity, this time with Buffett in step, marches on.From a purely operational point of view, almost nothing. But, from a financial point of view, Heinz's balance sheet can now be injected with more debt to spice up returns. Note that Buffett, along with $4bn plain-vanilla equity, is also contributing $8bn via preferred shares that will carry a high-interest coupon. It would be hard for Heinz, as a public company obliged to fund itself relatively conservatively, to copy that model. Private equity, this time with Buffett in step, marches on.
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