Is it an Expensive Deal?
At a purchase price of $72.50 per share, the deal values Heinz at nearly 14x trailing EBITDA, a 30% premium to Heinz’s 10-year EBITDA average. It seems to be quite pricey compared to its listed peers, including ConAgra Foods, Inc. (NYSE:CAG) and Nestle. ConAgra Foods, with a 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. 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 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 as much as nearly 20 times EBITDA. In November 2012, ConAgra bought Ralcorp Holdings, Inc. (NYSE:RAH), a leader in the private brand food sector, for around $90 per share, with a total transaction value of $6.8 billion. The deal values Ralcorp at around 11x EV/EBITDA. Thus, the ConAgra/Ralcorp deal seems to be the cheapest. Among the three, ConAgra had the lowest LTM operating margin at 8%. Nestle’s operating margin is the highest at 16%, while the operating margin of Heinz is 14%.
Foolish Bottom Line
With a 14x EBITDA, the Heinz buyout deal doesn’t seem to be quite expensive. Personally, I think it is a fair deal. As Warren Buffett put it: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” With the market leading position, Heinz has quite a wide moat. It is really a great business that has been purchased at a fair price.
The article Warren Buffett’s Tasty Food Deal originally appeared on Fool.com and is written by Anh HOANG.
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