NEW YORK -- H.J. Heinz Co. rebuffed the initial takeover bid by billionaires Warren Buffett and Jorge Paulo Lemann before agreeing to a higher price in a $23 billion deal that was put together in a quick two months, said sources familiar with the matter.
Buffett's Berkshire Hathaway and Lemann's 3G Capital made a $70-a-share bid for Heinz in a letter sent Jan. 14, they said. Heinz sought a better price, so within weeks Buffett and Lemann had offered $72.50 a share and made the deal, said the sources, who asked not to be named because the process was private. The stock closed at $60.48 Feb. 13, the day before the deal was announced.
The rapid transaction shows how the combined coffers of the 82-year-old Buffett, worth $52.7 billion according to the Bloomberg Billionaires Index, and Brazil's richest man, 73-year-old Lemann, worth $19.1 billion, make it a lot easier to pull off a buyout of an American icon like Heinz.
"You have two guys with decision-making power and really big check books," said Erik Gordon,a business professor at the University of Michigan in Ann Arbor. "They were able to make the deal happen without a lot of screaming and yelling. And it probably takes about 20 minutes to line up the debt for a deal like this."
Berkshire's investment will include a preferred stake of $8 billion, which gets an annual dividend of 9 percent, Buffett's firm said in a regulatory filing. Berkshire and 3G each will have more than $4 billion in equity in Heinz, according to three people familiar with the deal.
Lemann initiated the buyout in early December when he approached Buffett. The two knew each other from their time together on Gillette's board before it was acquired by Procter & Gamble. They both also have been investors in Anheuser-Busch InBev. Buffett was an easy sell, said people familiar with the conversations.
Lemann had been watching Heinz for some time, those people said. Like Buffett, he has a penchant for companies with popular brands, strong cash flow and global growth. With investments in Anheuser-Busch and Burger King Worldwide Inc., Heinz was right in his wheel house.
For his part, Buffett has been seeking deals since the cash pile at Omaha-based Berkshire climbed to more than $45 billion.
The two men discussed the deal for about two weeks before Lemann, a 3G co-founder, and Alex Behring, who runs the firm's New York office, went to Pittsburgh to meet with Heinz CEO Bill Johnson at his house and make an introduction, the people said. Johnson was open to listening. After the meeting, he asked for time to think about a deal, people familiar with the matter said.
Johnson hadn't seen this coming, one of those sources said. He quickly contacted his board and Centerview Partners, which had been advising Heinz on other matters. The Heinz board formed a special committee to review the offer and brought in advisory firm Moelis & Co. to have a separate adviser look at the deal.
3G had been studying Heinz from public financial statements for some time, the people said. It calculated that the company had enough cash flow to carry more debt and liked Heinz's growth overseas. Heinz's business outside North America and Europe grew 27 percent last year to $3.6 billion and now is 31 percent of its business.
On Jan. 14, 3G and Berkshire made an offer of $70 a share, a 19 percent premium over the closing price that day. Both Johnson and the board said it wasn't good enough.
Although they were told "Buffett doesn't budge," one of the people said, they knew Heinz, with a strong brand name and about $1.5 billion in operating cash flow, was an attractive target and they could hold out for more, the people said. They also knew Buffett and 3G, like many private- equity firms, have a lot of cash that needs to be invested.
The board and management wanted a 20 percent jump over that price. Buffett budged and settled on $72.50.
Once Heinz's board was convinced it was getting a good price, selling the banks was easy. Of the $28 billion value, including debt, $16 billion of it comes straight from the pockets of Berkshire Hathaway and 3G. With that much equity, banks were comfortable lending $12 billion to finance the rest, the people said.
Although the 20 percent premium is on the low end of what is typical for such deals, food company stocks are trading above the overall market so investors might be pleased with this deal, said Jay Ritter, a finance professor at the University of Florida in Gainesville.
"Berkshire Hathaway isn't known for paying top dollar," Ritter said in a phone interview. "But when the market is selling for around 12 times earnings and Heinz was around 20, demanding a bigger premium is unrealistic."