Published: Thursday, 14 Feb 2013 | 8:18 AM ET
Anticipation no longer. After years of eyeing H.J. Heinz, Warren Buffett forged an agreement to acquire the ketchup maker in the largest deal in the food industry's history.
Berkshire Hathaway and 3G Capital Management will pay $72.50 a share, or $23.3 billion, for Heinz — a 19 percent premium to the stock's all-time high. Including debt, the deal is valued at $28 billion.
Shares of Heinz were up nearly 20 percent in early trading following the announcement. (Click here to track the stock's reaction to the buyout news.)Although Heinz shares briefly traded above the offer price, Buffett said he had no intention of raising the offer price. That move in the stock may have reflected the value of the dividends Heinz will pay ahead of the deal's closing.– Article Continues Below –
Berkshire and and 3G will each put up $4.4 billion in equity for the deal, along with debt financing from JPMorgan Chase and Wells Fargo. Berkshire is also buying $8 billion of preferred stock that pays 9 percent. The deal is expected to close in the third quarter of this year.
The deal is an unusual one for Buffett since he is partnering with 3G, a Brazilian private equity firm that owns a majority stake in Burger King. Typically, Buffett prefers to make his acquisitions outright. However, the billionaire investor told CNBC that he was approached with the idea for the deal in December, and thought it was "my kind of deal."
"This is my kind of deal and my kind of partner," he added. "Heinz is our kind of company with fantastic brands." Buffett added, "but I have a file on Heinz that goes back to 1980."
In addition to its namesake ketchup, Heinz owns Ore-Ida potatoes, Lea & Perrins Worchestershire sauce and Classico pasta sauce.
3G founder Jorge Paulo Lemann approached Buffett in mid-December about a possible deal, and both approached William Johnson, Heinz's chairman, president and CEO, soon after. The first offer was made in mid-January. The deal was first announced on CNBC, and later confirmed by Heinz.
According to Buffett, 3G will be the primary supervisor Heinz's operations after the deal closes. Other 3G founders include Carlos Alberto Sicupira, Marcel Hermann Telles, Roberto Thompson Motta, and Alex Behring.
3G has been active in the consumer space. In addition to its investment in Burger King, Lemann was involved in the mega-merger that created Anheuser-Busch Inbev, the world's largest brewing company.
Buffett and Lemann also have ties to one another as the two once sat together on the board of Gillette prior to its takeover by Procter & Gamble in 2005.
In a press conference, 3G said it was too early to talk about whether there will be any major cost cutting opportunities at Heinz.
However, cost-cutting may need to be an important part of making the value of this deal work.
Robert Dickerson, a food analyst at independent research firm Consumer Edge Research, said he thinks Berkshire and 3G are paying a "sizeable" amount for Heinz given the company's recent performance.
"They are buying Heinz at a position of weakness," he said. "If they were well-positioned, why are they financial buyers, not strategic buyers."
In a press conference, Johnson touted Heinz's record of 30 consecutive quarters of top-line growth and an all-time record market capitalization.
However, Dickerson argues that much of Heinz's recent earnings growth has been driven by factors such as a low tax rate, while its business remains under pressure.
More 'Elephants' Out There
Buffett noted that the Heinz deal leaves Berkshire with enough cash on hand to bag another "elephant."
Berkshire Hathaway shareholder Jeff Matthews said the Heinz deal "plugs a big hole" in Berkshire's portfolio.
"It makes total sense to me," Matthews said in an interview on CNBC. "I think what it really reflects is the big hole in Berkshire's portfolio has always been a consumer packaged goods company, like a Heinz."
Matthews noted that at shareholder meetings Buffett often talks about what a good deal the Mars deal was for him.
Berkshire helped fund Mars' 2008 purchase of gum manufacturer Wm. Wrigley Jr. That deal, valued at $21.9 billion, previously ranked as the largest food company transaction. In that deal, Buffett put in about $6.5 billion and received high-yielding preferred shares in return.
Nelson Peltz, who waged and won a proxy contest with Heinz in 2006, told CNBC, "The transaction really came about because of the amazing performance that Heinz has demonstrated over those last seven years."
More Consolidation Ahead
Peltz expects to see more deals coming, and not surprisingly shares of other food stocks were trading higher in the wake of the Heinz news. (Read More: This Is Just the Beginning for M&A Deals: Peltz)
"I think there are many more deals coming," Peltz said. "I'll say it again, that's why we made our investment in Lazard last year. We think this M&A market is back. Revenue growth is hard to come by. I think most of the corporate America feels that they have skinnied down their operations to a point where they can't get much more out of it, so synergies are the next wave of getting (earning per share) growth."
Among the food stocks trading higher Thursday were ConAgra, Hershey, Kraft Foods Group, and General Mills. Shares of Hershey, Kellogg, Hormel, J.M. Smucker, and General Mills all touched all-time highs.
Berkshire and 3G were both advised by Lazard, JPMorgan, and Wells Fargo. 3G's legal advisor was Kirkland & Ellis and Berkshire was advised by Munger, Tolles & Olson.
Heinz was advised by Bank of America/Merrill Lynch, Centerview Partners, and Davis Polk & Wardwell.