Berkshire Hathaway Inc. (BRK.B): How Will This Brand Progress With The Buffett Backing?

Berkshire Hathaway Inc. (NYSE:BRK.A)As the world knows, H.J. Heinz Company (NYSE:HNZ) announced it agreed to be acquired by Berkshire Hathaway Inc. (NYSE:BRK.B) and 3G Capital, a private equity firm, on Feb. 14, 2013 for $72.50 per share, or about $28 billion. The offer is a 20% premium to the closing price the prior day, which is on the low end versus historic premium levels. Initially the stock traded up to $72.60 behind speculation of a higher offer. However, the shares now trade at $72.27, and there is no indication of a higher offer elsewhere. The transaction was already approved by the H.J. Heinz Company (NYSE:HNZ) board and is pending shareholder approval.

The $28 billion purchase price at the time of the announcement was at 13.2 times FY13 Thomson consensus EPS. Other transactions of large cap packaged foods, most recently Cadbury, occurred at a similar valuation, further indicating that a higher offer is probably not in the works for Heinz.

Berkshire Hathaway Inc. (NYSE:BRK.B) and 3G Capital were interested in Heinz for its strong brands and growth in certain businesses. H.J. Heinz Company (NYSE:HNZ)’s growth in emerging markets, 21% of sales, was strong and the primary driver behind higher sales. Its developing market exposure is greater than its primary peers: Kellogg has 15%, and the remainder around are 10% or below.

One argument against Heinz prior to the deal was the quality of earnings versus its peers. Heinz received a steady contribution from a lower average tax rate. While the cash tax and book tax rates differ, the lower rate likely carried through to cash tax and led to higher free cash flow generation. Steady FCF has always attracted Buffet and private equity.

Berkshire Hathaway Inc. (NYSE:BRK.B) and 3G Capital will have to address the company’s performance in developed markets. First, developed market organic growth rates are below those of its peers like Campbell’s, General Mills, Kellogg, and Kraft. North American organic sales have been in the 0-1% range over the past six quarters, and the brands need some revitalization.

Impact on Industry

Although the deal is significant in size, it is not necessarily indicative of more looming large acquisitions by outside players. Multiples in the sector have likely had some positive impact, but packaged foods already traded at multi-year highs. The 20% premium, historically low as noted earlier, further supports the relatively high multiples the stocks already trade at.

Heinz’s portfolio will be evaluated and some divestures are probably on the horizon. Industry players looking to acquire brands, such as ConAgra and Kraft, could purchase some of Heinz’s assets. The frozen food portfolio is one likely candidate. Management of Heinz already announced plans to divest Shanghai LongFong Foods, an underperforming brand in China.

The valuation seems fair when looking at the group and comparing its valuation to Kellogg. Packaged food competitor Kellogg trades at about 11.4 times FY13 earnings and is negatively impacted from taxes versus the benefit that Heinz has had recently. It has lower, but still significant sales exposure (15%) to emerging markets. However, Kellogg does have a lower operating margin of 11% compared to 12.4% at Heinz. That said, the businesses are somewhat different since Kellogg has such a large presence in cereals, an area in which Heinz is not a player.

Conclusion

The shareholder vote to approve the deal is expected to go smoothly and the deal should close in 3Q13. The impact on the landscape of the industry is somewhat minor at this point. As noted earlier, it could result in more deals if Heinz divests certain business. Heinz may also start to add to its portfolio with strong financial backing from Berkshire Hathaway Inc. (NYSE:BRK.B). Also, the premium the industry trades at versus the S&P is not likely to expand due to further speculation on acquisitions. Berkshire Hathaway Inc. (NYSE:BRK.B) has participated in many transactions and investment opportunities, such as this example.

The article How Will This Brand Progress With The Buffett Backing? originally appeared on Fool.com and is written by Mike Thiessen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!