The Berkshire Hathaway and 3G Capital deal to acquire the H.J. Heinz Company has received a great deal of attention in the world of consumer products and beyond. This deal is reported to be the largest ever in the food industry, so it is not surprising to see a host of financial analyses, lawsuits, insider trading investigations and other speculations swirling.
On the surface, this seems like a run-of-the-mill investment for Berkshire Hathaway, who before this deal had about $47 billion cash on hand. Considering their current investments in consumer products with Coca-Cola, Anheuser-Busch and See’s Candy, adding the 144-year old Heinz to the mix seems in line. Mr. Buffett is also known for investing in healthy, well-run, well-managed companies, and again, most would consider Heinz to be in that camp. However, teaming up with 3G Capital and the premium that some feel he paid for the stock has led to a bit of discussion.
In contrast to Berkshire Hathaway’s approach, 3G Capital is typically involved in deals where the company is in need of turnaround leadership (e.g. Burger King). Considering Heinz’s recent growth to a record $11.6 billion in sales and record net income, Heinz seems to be outside 3G’s typical profile company. The two companies offered $72.50 per share for HZN, a 20% premium over Heinz’s closing stock price the day before the offer. Some analysts say that the deal multiples are a bit rich, speculating that perhaps the deal will require 3G to work its operational magic to help cut costs or use price increases.
An interview with Mr. Buffet on CNBC tried to drill in to the future plans for Heinz leadership and operations. Mr. Buffet said he expected for Heinz leadership to stay in place and work with 3G, but ultimately said “the 3G people are in charge” and “it’s their baby from an operational standpoint.” At the press conference on the day of the deal, William Johnson joked when he was asked about his future there. He said, “My wife, who is in the back of the room, said you are not sitting at home and having lunch with me. So I hope to continue to do something, if it is not here I hope it is somewhere else.”
On the other side of the coin, others think that Berkshire Hathaway and 3G Capital are getting a deal by paying $72.50. Using some other consumer product company examples, like Hershey, some believe that the stock is well undervalued and the deal will benefit company insiders at the stockholders’ expense. A couple of lawsuits have already been filed to try to stop the deal or alter the sale process.
Lawsuits filed by the SEC on insider trading also surround this deal. The US district judge froze a Swiss account holding $1.7 million in overnight profits after the deal was made, requiring the mystery investors to show up in court to claim their prize. Shockingly, no one showed. Judge Rakoff was quoted as saying, “They can hide, but their assets can’t run.”
It will be interesting to watch how the investment of Berkshire Hathaway and 3G Capital will impact the future of Heinz, as well as other consumer products companies. Some are speculating that this may open the door for other similar acquisitions by Berkshire Hathaway. After all, even after this deal and their cash reserves, Berkshire still has about $15 billion in “walking around money.” Mr. Buffet says that he’s ready for another elephant deal, so if anyone sees one walking around to call him.