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A Note on the Purchase of Heinz

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 Heinz acquisition by 3G and Buffett:

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

(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) 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 Heinz 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: long BRK/B

To sum this up: 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 BRK.  After all, it”s not like he doesn’t have the liquidity to do it.

Full disclosure: long BRK/B


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3 Responses to A Note on the Purchase of Heinz

  1. [...] Pay attention to what Warren Buffett is doing with Heinz ($HNZ).  (FT also Aleph Blog) [...]

  2. Conscience of a Conservative says:

    Feels like an LBO or closer to one than Buffet has ever engaged in. His previous comments on leveraged buy-outs were not favorable Once more it appears we are seeing that the investments and opportunities Berkshire engages in are quite different than what gathered it fame in the 70′s & 80′s.

  3. [...] need to correct one thing that I wrote yesterday: 3G and  Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) each own 50% of  H.J. Heinz Company [...]


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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