Heinz Buyout: How Warren Buffett and 3G View It

Heinz Buyout: How Warren Buffett and 3G View It
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Heinz Buyout: How Warren Buffett and 3G View It

I participate in an online group of Johns Hopkins students and Alumni, mainly discussing company analysis and valuation.  This is what I posted on the H.J. Heinz Company (NYSE:HNZ) acquisition by 3G and Warren Buffett:

There are two ways to look at this: like Buffett or like 3G. Let’s look at both:

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(1) 3G will be the active partner. Their stake is equity only, and own 70%. They very well may have cost savings or product or marketing synergies. They are businessmen, not speculators. They will use Heinz to create a better & more global company.

(2) Warren Buffett gets 30% of the equity for $4B, and $8B of preferred stock paying a 9% coupon. It doesn’t matter much where he places the equity in his holding company, but the preferred will go into some of the insurance companies, where it will be financed by cost-free float, require minuscule amounts of capital, and be taxed at preferential rates.

Over a long enough period of time (~20 years), the preferred pays for the whole deal, and any value of owning 30% of H.J. Heinz Company (NYSE:HNZ) is gravy. (They sell gravy too.)

After the Burlington Northern acquisition, I wrote this post to justify the price paid: The Forever Fund. Regarding Heinz, ask the same questions — what would take to create a company like Heinz from scratch, i.e. replacement cost, including all of the regulatory hurdles.

Between Buffett and 3G, you likely have the financing and the savvy for a significant joint venture that will be mutually profitable. Nothing is a slam-dunk, but this looks good.

Full disclosure: Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)

To sum this up: Warren Buffett gets focused talent; he doesn’t have to concern himself with managing Heinz. He gets a stable asset that he can cheaply finance that will throw off a minimum of 6% on average (assuming 3G performs adequately; they have done better than adequate in the past).

3G gets patient capital.  They can take short and long-term steps to maximize the value of Heinz without a lot of interference or second guessing.  And if they do it very well, their upside is levered by Buffett’s preferred financing.

If they blow it… that’s another thing, but Buffett would hold the option of restructuring Heinz with a new partner, or finding talent to run it internally at Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B).  After all, it”s not like he doesn’t have the liquidity to do it.

Full disclosure: long BRK/B

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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