Did Buffett Overpay for H.J. Heinz Company (HNZ)?

Page 1 of 2

Warren BuffettBerkshire Hathaway Inc. (NYSE:BRK.B) and investment firm 3G Capital are paying $72.50 per share for ketchup king H.J. Heinz Company (NYSE:HNZ), in deal valued at $28 billion — the largest food group acquisition on record. The price represents nearly a one-fifth premium with respect to the all-time high price of Heinz’s stock, and nearly 21 times estimated earnings per share for the next 12 months! Has Berkshire CEO Warren Buffett forgotten his famous value discipline and gone and overpaid for Heinz?

“Price is what you pay, value is what you get,” as the saying goes. What is Buffett getting in return? Well, Heinz is a 144-year old company with a stable of iconic brands — not just Heinz ketchup, mind you, Heinz also produces Lea & Perrins Worcestershire sauce, for example. Those brands are at the heart of Heinz’s competitive moat, and that translates into wonderful returns: Return on capital has averaged 13% over the prior 10 fiscal years and average return on equity was nearly 37%! In fact, on reviewing Heinz’s business and fundamentals, I was rather incredulous when I could find no record of Berkshire ever having owned the shares previously — Heinz is the archetype of the business that Buffett says he looks for.

Great business, middling investment?
Still, one must distinguish the business from the stock. No matter how great the former, overpaying for the latter will produce poor returns, or even losses. When KKR acquired RJR Nabisco for $25 billion in 1989 after multiple raised bids — then the biggest leveraged buyout in history — it sealed its fate: The investment was failure.

And speaking of leveraged buyouts… that may be one of the keys to understanding the Heinz acquisition and its price tag. Indeed, this is not a traditional Buffett acquisition in which Berkshire pays in cash or a combination of cash and shares and the target joins the fold. Instead, Berkshire and 3G Capital are equal equity partners, each putting forward $4 billion in equity; Berkshire will also invest $8 billion in preferred shares paying 9%. The balance of the financing will be provided by rolling over existing debt and raising new debt — keep in mind that high-grade corporates are issuing bonds at near-historic low yields. Buffett also told CNBC this morning that 3G would supervise the business, saying “Heinz will be 3G’s baby.”

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

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!