Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) and 3G Capital recently announced the acquisition of H.J. Heinz Company (NYSE:HNZ) for $72.50 per share. We get into the math behind the deal here. Although the purchase does look pricey so did Warren Buffett’s purchase of Burlington North Santa Fee several years ago. However, that purchase proved to be an excellent buy, according to most Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) experts. At $72.50 per share for Heinz, the implied multiples on Consensus 2013 estimates included a 19.6x P/E, 15.3x EV/EBIT, 13x EV/EBITDA, 2.3x sales. These multiples are consistent with other global CPG transactions.
- Despite investor worries over a low tax rate and challenging fundamentals in select markets, some believed that Heinz’s earnings power was not being fully recognized by the market, something which Warren Buffett might have noticed.
- Heinz’s earnings power of close to $4 a share was based on long-term improvement in emerging market margins, the absence of SAP spending, potential U.S. account win with McDonald’s, and the recovery of lost transactional profits in the U.K.
- CEO Johnson’s tenure over the last 15 years has been marked by mixed results as the company was transformed into a more global player. Many see this sale as a logical and value-creating end game for his public leadership.
- With packaged food companies struggling over the last 18 months with weak volume and high inflation, absolute valuations have been towards the low to middle end of historical ranges. CEO Johnson has always been an advocate for industry consolidation and this could prove to be a signal to investors that other companies may need to consider consolidation as well.
The purchase of H.J. Heinz Company (NYSE:HNZ) is also a huge transaction in the consumer staples space. H.J. Heinz Company (NYSE:HNZ) satisfies Berkshire’s preference for companies with strong brands/moats, cash flow discipline, and good management. There is also potential for a step-up in profit margins three years from now as the company comes to the completion of its information systems overhaul and starts reaping the benefits of the scale it is building in emerging markets.
Implications:
- This bid has positive implications for valuation across the staples space. Low borrowing costs give private equity a lot of firepower, and they like companies like these because the strong and consistent cash flows allow for a high degree of financial leverage. Campbell strikes us a company that is quasi-private already given the family ownership, but the family seems unwilling to go all the way. Is General Mills a possibility?
- Campbell, Unilever, Nestle, and Kraft Foods have all been considered potential candidates for a Heinz merger in the past, but many would likely be highly surprised if any one of them tried to top the Berkshire/3G bid. Cost synergies with Kraft and Campbell in the U.S. would theoretically be significant, but not internationally. Neither Unilever N.V. (NYSE:UN) nor Nestle (NSRGY) appear interested strategically.
Analysts at Credit Suisse think that private equity would have a hard time topping this particular bid given the size of the deal and the financial firepower of Berkshire.
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) still owns a big equity stake in Mondelez and Kraft but, Buffett is a seller of both. The H.J. Heinz Company (NYSE:HNZ) transaction could lead to Berkshire to accelerate its selling of those shares.
Even if this does not trigger a wave of consolidation, analysts at RBC capital believe a Heinz takeout has positive valuation implications for the group given: 1) the purchase price is relatively high ( approximately 13x EBITDA vs. peers in the 10-11x range), particularly for a financial buyer where synergy opportunties are more limited; 2) the buyer is Buffett; and 3) the fact that Heinz fundamentals are on balance weaker than the broader peer group. If the group gets re-rated higher, the impactions could be that lower multiple stocks (GIS, CPB, SJM, etc.) see more of a bid, even if they are not obvious takeout candidates. For consolidator models like SJM or BGS, some think the implications are mixed. This could trigger a pickup in M&A activity, but it will likely also make it more difficult to do deals at attractive valuations.
