H.J. Heinz Company (HNZ) Is In Warren’s Pantry

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Is it an expensive deal?

The deal is the largest ever in the food industry. At a purchase price of $72.50 per share, the buyers are paying about 14.6x trailing EBITDA. That compares with the median of 7.6 times EBITDA in a survey of more than 100 comparable deals worldwide. The deal seems pricy as compared to its peers, including ConAgra Foods, Inc. (NYSE:CAG) and Nestle SA Reg Shs. Ser. B Spons (ADR) (PINK:NSRGY).

Why not buy into other steady goers in the food business like Kraft or ConAgra or Nestle?

In the world of staple products, Kraft has proven too risky for Buffett’s taste. He chastised the company for buying Cadbury in 2010. To free up cash for the purchase, Kraft sold its frozen-pizza business (DiGiorno, Tombstone and Jack’s pizza) to Nestle. Frozen pizzas were a big winner during the recession, but Kraft wanted a bigger piece of fast-growing emerging markets, where Cadbury is a big player. Kraft has since split into two separate businesses, a move that shook investors, and Buffett has sold a big chunk of his holdings in the company.

ConAgra Foods is another relatively risky grower. ConAgra Foods, with the trading price of $33.70 per share, is worth nearly $13.7 billion on the market. The market is valuing ConAgra at 11.45x EV/EBITDA. The company’s $6.8 billion cash purchase of private-label company Ralcorp Holdings, Inc. (NYSE:RAH) in November for around $90 per share is a big bet on the growth of private-label products globally. The deal values Ralcorp at around 11x EV/EBITDA.

Among the three, Nestle is the biggest company with a $218.5 billion market cap. It is valued at around 13.5x EV/EBITDA.  However, the Heinz deal is not as expensive as the Nestle/Pfizer Inc. (NYSE:PFE)’s baby food deal.  In April 2012, Nestle purchased Pfizer Nutrition, a baby food business from Pfizer for around $11.85 billion, or nearly 20 times EBITDA. Thus, the ConAgra/Ralcorp deal seems to be the cheapest.

Foolish Bottom Line

“It’s my kind of deal and it’s my kind of partner,” Warrent Buffet said.

Heinz has dabbled in its own riskier plays in the past—for instance, buying into pet food (9 Lives and Kibbles ‘n Bits) and canned tuna (StarKist), businesses it later sold to Del Monte. But recently, the iconic global brand has come back to what it does best: earning a hefty premium for mixing vinegar with tomatoes. With a 14.6x EBITDA, I think Heinz is a fair deal.

There may be some wizardry in the Heinz recipe, but not in its corporate strategy. And that’s magic enough for a wizard with simple tastes!

The article Heinz Is In Warren’s Pantry originally appeared on Fool.com and is written by aakanksha patodia.

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