Friday, February 15, 2013 2 comments

Warren Buffett's Heinz Acquisition

Sorry about the lack of posts but have been busy the last few months—in fact, more like the last 2 years—but hope to be more involved in the future. Another reason I have been sort of out of the market is because I find it expensive and don't really see any great opportunities.

Anyway, just saw that Warren Buffett participated with private equity group, 3G, in the acquisition of Heinz (HNZ), and thought I would post my quick thought. As most of you may know, Heinz is famous for ketchup and various food products.

Similar to the railroad, Burlington Northern Santa Fe, that Warren Buffett acquired a few years ago, this deal to participate in the Heinz buyout looks expensive (the verdict is still out on the Burlington Northern Santa Fe investment). This Fortune opinion piece sort of has similar feelings. My opinion is that Buffett is running out of good opportunities and is willing to seek out slightly-above-average opportunities given the super-low interest-rate environment.

The deal is valuing Heinz at around 20x P/E for a low-growth, albeit very stable, business. However, Buffett is only putting up a portion of the funding in return for preferred shares yielding 9%, and a sizeable chunk that is owned by the 3G private equity group is going to be funded via debt. So, leverage is going to boost the returns for the buyout group, with all the debt risk being held by the 3G private equity group while Buffett only owns preferred and common shares.
 
From a risk point of view, this is a great deal for Buffett. Overall, this will produce above-average return but nowhere near superinvestor returns he had in his younger days. The investment likely yield 1% to 2% above S&P 500 in the long run and that is kind of Buffett's goal (he has alluded to this in his shareholder letters). Obviously, newbie and amateur investors trying to earn returns like 'Buffett Prime' won't learn much from this deal. 

Posted: 2/15/2013 10:08:00 PM
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2 Response to Warren Buffett's Heinz Acquisition

Anonymous
February 15, 2013 at 11:38 PM

"Leverage is going to boost the returns for the buyout group, with all the debt risk being held by the 3G private equity group while Buffett only owns preferred and common shares."

Sorry, this is patently false. The Fortune journalist got it all wrong. If financial reporters knew what they were talking about, they would be investors and not financial journalists.

Here’s the real preliminary structure, as discussed by the Ratings agency reports:

http://www.reuters.com/article/2013/02/15/newstory-idUSL1N0BF97Z20130215

$1.5 billion Senior Secured Revolver (undrawn at close)

$8.5 billion Senior Secured Term Loan (USD)
$2.0 billion Senior Secured Term Loan (EUR)
$2.1 billion 2nd Lien Bridge Loan

$5.2 billion Existing Debt

$8 billion Preferred (9% cash coupon) = Berkshire

$4.12 / $4.12 billion Common Equity = Berkshire / 3G

Per the Fitch report: “The new debt financing is not expected to be secured by 'principal property' or other assets that cannot be pledged without triggering the equal and ratable clauses under the rolled over existing debt; therefore, the existing debt will not be pari passu with the new senior secured debt.”

It’s obvious that 3G did not structure the debt as some kind of HoldCo acquiring entity. (A) That’s not tax efficient, (B) That’s far from looking like the “partnership” that Warren talked about on CNBC, (C) That's not how the entire market is pricing the existing Heinz debt, (D) That's just not how LBO's are structured.

Warren and 3G’s Common Equity positions are sitting in the exact same seat, bearing the exact same leverage risk.

The Preferred is a different story, but that's not discussed by the journalist.

Separately though... I agree with you on your other points. You're right about smaller investors being able to do better if they look hard enough.

Sivaram Velauthapillai
February 20, 2013 at 10:38 PM

Hi Anon,

Thanks for commenting and correcting the post. If I understand you correctly, are you suggesting that the risk the same for both parties since they contribute an equal $4B in equity, and the remaining portion from 3G is being debt-financed by themselves rather than Heinz? I agree with that if that is what you are saying.

Thanks for the commenting.

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