Warren Buffett, the most successful and respected investor in the world, has recently pulled the trigger on H. J. Heinz Company (NYSE:HNZ), one of the largest global makers of ketchup and baby food. His firm Berkshire Hathaway Inc. (NYSE:BRK.B) partnered with 3G, a Brazilian private-equity firm, to purchase Heinz at around $72.50 per share, with a total transaction value of $28 billion. The purchase price represented a 20% premium to its Wednesday’s closing price of $60.48 per share. Some might argue that Warren Buffett has overpaid this time, but Buffett said that it was his “kind of deal and kind of partner.”
Heinz is a Wide Moat Business
Heinz is considered the global leader in the ketchup and baby food businesses, with a global brand portfolio and world-class iconic brands. Over the last 10 years, Heinz has reduced the number of business categories from 6 in 2002 to only 3 in 2012. The three main business categories are Ketchup & Sauces, Meals & Snacks, and Infant/Nutrition. Around 47% of the total sales were generated from the Ketchup & Sauces business, including one of its key brands, Heinz Ketchup. Heinz Ketchup is considered a market leader in several markets, with a 60% market share in the US, 70% in Canada, and around 80% in the UK. For the last 10 years, Heinz has been increasing its global mix successfully. The sales from emerging markets have grown significantly, from 7% in 2002 to nearly 25% in 2012. In the first quarter of fiscal year 2013, Heinz derived two-thirds of its revenue from the international market.
Tasty Deal for Buffett
The Heinz acquisition is not a common buyout deal that Warren Buffett often does. Looking closely into the deal structure, I find that the majority of his investment goes into preferred stocks. Berkshire Hathaway will invest more than $4.5 billion for a 50% stake in the company, and 3G will invest an equal amount for another 50% stake. In addition, Berkshire Hathaway will invest an additional $8 billion in preferred stocks in the company. Thus, out of the $12.5 billion that Buffett invests in the deal, around 64% goes into preferred stock investment. Interestingly, the preferred stocks carry a juicy dividend yield at 9%. Thus, the $8 billion preferred stock will pay Buffett a yearly stable preferred dividend of $720 million.