Melissa Leong | Feb 14, 2013 7:15 PM ET | Last Updated: Feb 14, 2013 7:27 PM ET
Kevin Lorenzi/BloombergWarren Buffett’s Berkshire Hathaway Inc. and Jorge Paulo Lemann’s 3G Capital agreed to buy HJ Heinz Co. for about $23 billion, ending the independence of an iconic ketchup maker that traces its roots to the 1860s.
Legendary investor Warren Buffett, famed for his love of cheeseburgers, has joked that he is well acquainted with ketchup-maker’s H.J. Heinz Co.’s products.
On Thursday, it was announced that Mr. Buffett’s Berkshire Hathaway Inc. and 3G Capital Management LLC have agreed to acquire the company for US$23.3-billion, or US$72.50 a share, a 19% premium to the stock’s previous record high. This, Mr. Buffett said, was “my kind of deal.”
This is the type of investment that he’s preached to investors all over the world
Mr. Buffett’s kind of deal has often involved packaged foods and iconic brand names, folksy cultural mainstays that you might have for a snack — a Coca-Cola, Dairy Queen cone or McDonald’s burger.
“It’s a classic investment,” said Mary Buffett, Mr. Buffett’s former daughter-in-law and author ofBuffettology and The Warren Buffett Stock Portfolio.
“He likes old companies because they show that they have a long, durable, competitive advantage in an industry. It’s all about the predictability of earnings…. All over the world, every kid is going to be drinking Coke, eating chocolate and putting ketchup on their fries, it’s actually just that simple.”
The Heinz deal highlights three of the billionaire’s favourite strategies: betting on snack foods, investing in companies he trusts others to manage and locking in above-market fixed returns.
“This is the quintessential Warren Buffett investment. This is the type of investment that he’s preached to investors all over the world for well over 30 to 40 years,” said Brian Sozzi, chief equities analyst for NBG Productions.
“Here’s a company that has already made strong inroads into emerging markets. They own most of their manufacturing facilities. Because their product is so strong, over time, they’ve shown that they can pass higher commodity costs to the consumer in the form of higher prices.”
Jorge Paulo Lemann, owner of 3G and Brazil’s richest man, will run the maker of condiments and Ore-Ida potato snacks after the deal.
Berkshire Hathaway is commiting more than US$12-billion for equity and a preferred stake.
“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.”
Mr. Buffett, 82, helped finance Mars Inc.’s purchase of Wm. Wrigley Jr. Co. in 2008 for about US$23-billion and controls the largest stockholding of Coca-Cola Co. Berkshire also owns chocolatier See’s Candies, ice-cream company Dairy Queen and food distributor McLane.
Heinz “just comes to mind as almost synonymous with ketchup, just as Coca-Cola is almost synonymous with soda,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business.
“[Buffett] says he likes businesses that he understands. That’s why he stays away from high tech. For example, he can’t predict what Apple and Google will look like in five or 10 years or what
competition they will have. At least with Coca-Cola, he knows what Coca-Cola will look like 10 years from now.”
Mr. Buffett has said he has more confidence in established brands of treats that can benefit from expanding sales outside the U.S.
“More people will be drinking Coca-Cola 10 years from now, or chewing Wrigley’s gum,” Mr. Buffett told Bloomberg Television in an interview last year. “I know that.”
Possessing a powerful worldwide brand is essential for sustained success
“Possessing a powerful worldwide brand is essential for sustained success” in some lines of business, Mr. Buffett wrote in his annual letter to shareholders in 2008, explaining his preference for companies with a “moat” protecting them from competitors. “Long-term competitive advantage in a stable industry is what we seek.”
One Berkshire investor had mixed feelings about the Heinz deal because of the limited growth prospects domestically.
“We’re a little hesitant on the staple companies because they don’t have any leverage in the United States,” said Bill Smead, chief investment officer of Smead Capital Management in Seattle.
Heinz shares climbed 20% to $72.50 at 4:15 p.m. in New York trading.
Berkshire advanced 1% to $149,240, a record close. That’s more than double their value in March 2009 when plunging equity markets dragged down the value of the Omaha, Neb-based company’s stock portfolio and a deepening U.S. recession hurt results at housing, retail and manufacturing units.
In the deal announced Thursday, Berkshire will get more than US$4-billion in equity in Pittsburgh-based Heinz and a preferred stake of US$8-billion paying a 9% annual dividend. The transaction is valued at about US$28-billion including assumption of debt.
With files from wire services