Much has been made out ofWarren Buffett getting into bed with Brazilian private equity firm 3G Capital in the $28 billion buyout of Heinz since Mr. Buffett has famously maligned PEs as financial engineers who don’t love their companies.
But the Heinz deal is not a typical leveraged buyout. For one thing, the amount of debt they’ll put on the books relative to the overall size of the company, is quite low. Heinz will take on USD 12bn in debt in the deal, which is 42% of the deal value, compared to 60% to 70% or more in most large LBOs.
More important, perhaps, is the fact that 3G Capital’s partners, unlike those at other private equity groups, actually get in there and run their companies. At Burger King, for example, 3G was able to ramp up the fast food chain’s EBITDA to $503 million from $320 million when it bought the company, all in the space of a year.
How did they do it? Especially when Burger King’s prior owners from 2002 to 2006, TPG and Bain, were not able to wring out all those efficiencies?
I posed this question to a Wall Street restaurant banker, and his answer was: “The 3G guys are operators.” He meant this in the positive sense. “These guys get their hands really dirty in their businesses,” the banker noted.
Indeed Daniel Schwartz, a partner at 3G Capital, took over as CFO of Burger King in October 2010, soon after 3G’s buyout of the company. That is different. Typically private equity firms buy companies, expecting to keep management intact, though they will change management in a heartbeat if things don’t work out as expected. Either way they hire others to run their companies.
Of course, there are also similarities between 3G and other private equity firms. For example, Burger King laid off hundreds of employees at its head office in Miami soon after the buyout, according to media reports. This is what PEs have gotten a lot of bad press for — destroying jobs. But apparently at Burger King, it’s something TPG and Bain should have done more of.
The layoffs included lots of names at the top. These folks were replaced with both internal and external hires, even one from AB InBev, the global beer empire where the 3G founders made a lot of their money.
This level of hands-on management may be impossible for private equity behemoths like Carlyle and KKR, which own dozens of companies at the same time. By contrast, 3G invests in 10 to 15 positions, of which five core holdings account for 60% of the portfolio, according to a 2009 article in Barron’s.
3G is also likely to hold its investment longer than the typical PE, say people who know the firm well. The firm, founded in late 2004, made its first big splash in the US with a $3.3 billion buyout of Burger King in 2010, which it took public 18 months later. But 3G still controls the chain.
Heinz’s slogan in its iconic 1979 commercial featuring Carly Simon’s “Anticipation” was that the ketchup’s taste was “worth the wait.” Will 3G stick around long enough to find out? It’ll be fascinating to watch.