The best investor in the history of modern times and the Brazilian owners of the best managed consumer goods company in the world just made a $28 billion bid (including debt) to take H.J. Heinz Company (NYSE:HNZ) private. Of course I am talking about Warren Buffett and Anheuser-Busch InBev NV (ADR) (NYSE:BUD)’s trio Mr. Telles, Sicupira and Lemann who own Private Equity (PE) firm 3G Capital.
Buffett will be helping through Berkshire Hathaway Inc. (NYSE:BRK.A)‘s deep pockets while 3G Capital will put money and, most importantly, a skilled and cost savvy management team. Beyond discussing the $72.50 per share price that Berkshire and 3G have agreed upon to acquire Heinz (which represents 2013 13.2x EV/EBITDA), let’s just try to understand the investment rationale. I am sure we shall be able to learn something from such great investors.
As a Columbia Business School Alumni, I had to study many of Buffett’s deals and having worked for AB InBev, I know what changes are to be expected in Heinz. For starters, Heinz, undoubtedly, is the kind of deal that Berkshire’s chairman likes: consumer goods sector, great brands and stable free cash flow generation. He could not get all this for a cheap price but, at 2013 20x P/E, the company does not seem extremely expensive for such a wonderful business.
Besides, the deal came with a 3G’s team attached to it. This PE firm is not a random one. Their track record on acquiring and managing big companies is impeccable. They have shown through AmBev (controlled by BUD), BUD and Burger King that, when they buy, they end up paying the right price. 3G’s stress in cost control and smart financial management plus their ample experience in emerging markets can make a huge difference in Heinz’s performance. From my point of view, Buffett and 3G bought a businesses with a huge business motto (or strong barriers to entry) at a good price taking into account all the inside work that can be made by 3G once the company is taken private.
Possible actions like unloading some of Heinz’s struggling brands and its frozen foods business could boost the company’s value in the very short term. Besides, those moves would perfectly mix with deepening what Mr. Johnson (Heinz’s CEO) has been doing since Nelson Peltz took his 5% stake in the company: cut costs, streamline operations and reinvest in marketing. As it was stressed by the people writing the Lex column at the Financial Times, Heinz grows slowly (1% to 2% ahead of inflation) but as they also state, Heinz’s returns on invested capital (ROIC), which is my favorite measure of economic return, lead the packaged food industry.