Dean Best

In the spotlight: Heinz's prospects under 3G and Buffett

By Dean Best | 15 February 2013

Heinz stunned the global food industry with news it had agreed to a US$28bn takeover offer from Warren Buffett's Berkshire Hathaway fund and private-equity firm 3G Capital - purported to be the largest-ever deal in the sector. Dean Best looks at what could lie ahead for the US food giant.

Wow. There are times when announcements take the breath away and yesterday's (14 February) from Heinz on its deal with Warren Buffett's Berkshire Hathaway and 3G Capital did just that.

The transaction, worth US$28bn, will, if and when it secures shareholder and regulatory approval, be the largest the international food industry has seen - surpassing Mars Inc's $23bn deal with Wrigley in 2008, a deal part-funded by Buffett.

What does the future hold for Heinz? Well, unsurprisingly for three men that had just shaken hands on the deal, the top executives from the ketchup giant and the two investment funds were bullish.

Heinz chief Bill Johnson said the company will become "bigger and better" under new ownership - more focused, more nimble, more competitive. Alex Behring, managing partner at 3G, called it an "historic day for the food industry". And Buffett, in that folksy way of his, told CNBC Heinz had "fantastic brands" and was his "kind of company".

Major news outlets ran with headlines with Buffett at their core. He is, after all, one of the world's most famous investors. However, the Sage of Omaha's Berkshire Hathaway fund is to take a back seat in the running of the deal. The fund and 3G will both own 50% of Heinz but the management of the company will reside with 3G. "It's their baby from an operational stand-point. It's a great partnership for us and any partnership where I don't have to do the work is my kind of partnership," Buffett remarked.

What work, then, lies ahead for 3G? The fund was founded by Brazilian billionaire Jorge Paulo Lemann and has had FMCG investment experience through investments in the beer industry and in the fast food sector with Burger King. Lemann was a key figure in the creation of the world's largest brewer Anheuser-Busch InBev and he is said to still own 10% of the business. 3G still has a stake in Burger King.

The fund, if past behaviour is anything to go by, could look to drive efficiency at Heinz. There has been a wave of restructuring at the ketchup and beans group in the last two years, including plant closures. However, when 3G controlled AmBev, the Brazilian brewer that merged with Interbrew in 2004 to combine InBev (which then combined with Anheuser-Busch four years later), they were said to push for efficiency strongly and monitor costs very closely.

"3G Capital was an investor in AmBev with a strong track record of driving productivity and stripping out costs," Barclays Capital analyst Andrew Lazar said.

While Heinz's recent restructuring has focused on factories and the supply chain, 3G could make even bolder decisions, some on Wall Street argue. The company's frozen business in the US has had its challenges and Sanford Bernstein's Alexia Howard indicates asset disposals could be an option for the new owners. "Recently, investors have begun to wonder whether the company should dispose of the troubled frozen business in the US," she said yesterday. "The move to private ownership could facilitate more restructuring and the sale of one or more of its businesses."

At a media conference in Heinz's home town of Pittsburgh yesterday, Johnson and Behring were asked repeatedly about the prospect of cost cuts; one reporter directly referred to 3G's record of "aggressive" cost cutting. Behring insisted it was too early to comment. "We have several months ahead of us to get to understand the team and the people," he said. "If you compare and contrast with some of the businesses we got involved with in the past this is a company that's doing extremely well as it is and has been doing extremely well for a number of years prior to our involvement."

Heinz chairman, president and CEO Johnson, who has been at the helm of the company for 15 years, claimed the company was being acquired "from a position of strength". He acknowledged "that doesn't mean there won't be changes going forward" but added: "Ultimately, this will be a platform for doing bigger and better things in this industry."

However, despite Johnson and Behring's insistence that they could not say whether cuts were coming, it is all but certain, given 3G's record and previous investor concern over the performance of some of Heinz's assets, that there will be restructuring.

Now let's think about possible expansion. The two men were at pains to describe the opportunity for growth. "Our goal here is to make this a better and even more global company. That is a goal we share with 3G and Mr Buffett," Johnson said.

Proponents of private ownership insist, away from the glare of the stock market and quarterly reporting, companies can thrive and think more about longer-term priorities. Heinz, although one of the more global of the US food companies, still lags multinationals like Nestle and Unilever in their presence in emerging markets.

"We have seen private companies executing better in developing markets than public companies - a prime example being Mars and Wrigley's success in China - perhaps because of a greater flexibility to invest for the longer term," Bernstein's Howard said, although she claimed it was "unclear" whether 3G and Berkshire were more interested in short-term restructuring or long-term growth.

But, taking Johnson and Behring at face value, Heinz could be set for expansion. In the short term, Heinz could be in a position to snap up any baby food assets Nestle has to offload to clear regulatory concerns in certain markets over its takeover of Pfizer's infant nutrition business last year.

Looking further ahead, some on Wall Street believe Heinz, backed by 3G and Buffett, could be at the forefront of consolidation in the US food sector. "We believe the new Berkshire/3G/Heinz entity could ... become a more active consolidator of the [US] food group going forward. In fact, on today's conference call, Heinz CEO Bill Johnson stated that the goal of this deal is to make Heinz a bigger, even more global food company and we would note he has been an active proponent of food industry consolidation in a sea of less-willing partners," Lazar at Barclays Capital said.

Lazar also pointed out 3G's record of looking for efficiency means "accretive M&A" could be a way of "driving productivity and synergies" especially with the $5bn in debt the investors have taken on under the deal.

There is, perhaps unsurprisingly with a deal that shook the sector, much to ponder. Heinz grabbed the headlines yesterday and it will likely do so again under its new owners. 

Sectors: Baby food, Canned food, Condiments, dressings & sauces, Frozen, Mergers & acquisitions

Companies: Heinz, Burger King, Wrigley, Mars Inc, Nestle, Unilever, Pfizer

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