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Berkshire Joins 3G Capital to Buy Heinz in US$23 Billion Deal

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Warren Buffett’s Berkshire Hathaway Inc and Jorge Paulo Lemann’s 3G Capital agreed to buy HJ Heinz Co for about US$23 billion, ending the independence of an iconic ketchup maker that traces its roots to the 1860s.

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The buyers will pay US$72.50 a share, compared with yesterday’s closing price of US$60.48, according to a statement today. Berkshire will spend about US$12.1 billion on the deal for the maker of condiments and Ore-Ida potato snacks. The transaction is valued at about US$28 billion including the assumption of debt, according to the statement.

Heinz benefits from “very powerful consumer goodwill in the developed markets and a very early start in China and India, two of the largest developing markets,” Tom Russo, a partner at Berkshire investor Gardner Russo & Gardner said in a phone interview. “It will not be hard to service the debt.”

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Buffett, 82, has been seeking deals after the cash pile at Omaha, Nebraska-based Berkshire climbed to more than US$45 billion. He has previously wagered on consumer products through equity investments in Coca-Cola Co and he helped finance Mars Inc.’s purchase of chewing gum maker Wm. Wrigley Jr. Co. Brazil’s Lemann, 73, is worth about US$19 billion based on holdings in Anheuser-Busch InBev NV and Burger King Worldwide Inc., according to the Bloomberg Billionaires Index.

Berkshire’s investment will include a preferred stake of US$8 billion, which gets an annual dividend of 9 per cent, Buffett’s firm said in a regulatory filing. 3G will join Berkshire in getting an equity stake of more than US$4 billion, according to three people familiar with the deal. The people asked not to be identified because some of the terms are private.

The deal will also be funded by the rollover of existing debt and debt financing committed by JPMorgan Chase & Co and Wells Fargo & Co, according to the statement.

Credit-default swaps protecting Heinz debt soared 130 basis points to 173.4 basis points at 4:31 p.m. in New York, according to prices compiled by Bloomberg. That’s about four times the level of the contracts before the deal was announced. Swaps typically rise as investor confidence deteriorates.
“Looks like the deal will involve approximately US$5 billion in new debt which would almost double Heinz’s debt load,” Anthony Valeri, a market strategist at San Diego-based LPL Financial said in a telephone interview. “I think the CDS move reflects uncertainty over exactly how much more levered Heinz will be after the transaction.”

Heinz, led by Chief Executive Officer Bill Johnson since 1998, had gained 17 per cent in the past 12 months as it boosted sales in developing economies. Heinz in November said fiscal second-quarter sales in emerging markets rose 13 per cent, excluding the effects of foreign currency fluctuations and acquisitions or divestitures.

Heinz elected billionaire Nelson Peltz to the board in 2006 following a six-month proxy fight. Peltz had been pushing the company to trim costs and sell assets to boost the ketchup maker’s share price.

3G will oversee the operations of the business, Buffett told CNBC, praising the investment company’s record with Burger King, which it acquired in 2010 and then took public last year. He said he expects Johnson to remain in charge and that 3G will have the final say.

“Any partnership where I don’t have to do the work is my kind of partnership,” Buffett said. Buffett is worth more than US$50 billion, according to the Bloomberg Billionaires Index.

Buffett and Lemann served together as directors of razor- maker Gillette Co. Buffett resigned from that board in 2003.

Heinz will retain its corporate headquarters in Pittsburgh, according to the statement. The company traces its roots back to 1869, when Henry John Heinz and neighbour L Clarence Noble began selling grated horseradish, according to Heinz’s website. The company introduced its famous Tomato Ketchup in 1876.
The deal is the largest ever in the food industry, the companies said. The buyers are paying about 14.6 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That compares with the median of 7.6 times Ebitda in a survey of more than 100 comparable deals worldwide.

“Buffett’s affection for strong brand names” make the company a good fit for his portfolio, said Christopher Growe, an analyst at Stifel Nicolaus & Co. “Heinz’s strong margins support robust free-cash flow generation.”

There have been more than US$280 billion announced deals this year, according to data compiled by Bloomberg. That’s 26 per cent more than in the same period a year earlier.

Centerview Partners LLC and Bank of America Corp acted as financial advisers to Heinz, while Davis Polk & Wardwell LLP provided legal counsel to the ketchup maker. The Heinz board committee that approved the deal got financial advice from Moelis & Co and legal counsel from Wachtell, Lipton, Rosen & Katz.

Lazard Ltd served as lead financial adviser to the investment group. JPMorgan and Wells Fargo also gave financial advice, and the two banks have committed to financing, according to the statement. Kirkland & Ellis LLP provided legal counsel to 3G Capital, while Munger, Tolles & Olson LLP acted as legal adviser to Berkshire.

Source: Bloomberg