Buffett joins ranks of recent buyouts with Heinz deal

Now the Oracle of Omaha is getting into the deal game by helping out with a $23 billion buyout of H.J. Heinz Co with 3G Capital.

Here’s the Wall Street Journal story:

H.J. Heinz Co. is best known for its ketchup, but what may make it especially tasty to Warren Buffett‘s Berkshire Hathaway Inc. and private-equity firm 3G Capital is its broad international reach.

Berkshire and the Brazilian-owned private-equity firm agreed to buy Heinz for $23 billion, marking one of the food industry’s largest-ever acquisitions. While the buyers will share ownership, 3G will call the shots on operations.

Pittsburgh-based Heinz generates two-thirds of its $11.6 billion in annual sales outside the U.S., with 25% in emerging markets, making Heinz a platform from which 3G Capital could make additional acquisitions in the food industry. Heinz’s strong cash flow could help make that happen.

The New York Times offers some context at the top of its story:

The proposed acquisition, coming fast on the heels of a planned $24 billion buyout of the computer maker Dell and a number of smaller deals, heralds a possible reemergence in merger activity.  The number of deals and the prices being paid for companies are still a far cry from the lofty heights of the boom before the financial crisis.  But an improving stock market, growing confidence among business executives and mounting piles of cash held by corporations and private equity funds all favor a return to deal-making.

In many ways, Heinz fits Mr. Buffett’s deal criteria almost to a T. It has broad brand recognition – besides ketchup, it owns Ore-Ida and Lea & Perrins Worcestershire sauce – and has performed well. Over the last 12 months, its stock has risen nearly 17 percent.

Mr. Buffett told CNBC that he had a file on Heinz dating back to 1980. But the genesis of Thursday’s deal actually lies with 3G, an investment firm backed by several wealthy Brazilian families, according to a person with direct knowledge of the matter.

One of the firm’s principal backers, Jorge Paulo Lemann, brought the idea of buying Heinz to Berkshire about two months ago, this person said. Mr. Buffett agreed, and the two sides approached Heinz’s chief executive, William R. Johnson, about buying the company.

Talk about patience, Buffett waited nearly 33 years for the chance to buy Heinz. But according to Bloomberg Heinz wasn’t initially interested.

Buffett’s Berkshire Hathaway Inc. and Lemann’s 3G Capital made a $70-a-share bid for Heinz in a letter sent on Jan. 14, the people said. Heinz sought a better price, so within weeks Buffett and Lemann had offered $72.50 a share and got the deal done, said the people, who asked not to be named because the process was private. The stock closed yesterday at $60.48.

The rapid transaction shows how when you have the combined coffers of the 82-year-old Buffett, worth $52.7 billion according to the Bloomberg Billionaires Index, and Brazil’s richest man, Lemann, 73, worth $19.1 billion, it’s a lot easier to pull off a buyout of an American icon like Heinz.

“You have two guys with decision-making power and really big check books,” said Erik Gordon, business professor at the University of Michigan in Ann Arbor. “They were able to make the deal happen without a lot of screaming and yelling. And it probably takes about 20 minutes to line up the debt for a deal like this.”

In the proposed takeover, Berkshire and 3G will each have more than $4 billion in equity in Heinz, and Buffett’s firm will also take a preferred stake of $8 billion, which gets an annual dividend of 9 percent, according to three people familiar with the deal.

Bloomberg also said that Heinz CEO Bill Johnson stands to gain a lot in the deal.

Having turned around H.J. Heinz Co., Chief Executive Officer Bill Johnson may reap about $100 million from the company’s buyout.

Johnson, who became Heinz’s sixth CEO in 1998, has made about 40 acquisitions, helping expand the company into emerging markets. He streamlined the brand portfolio, boosted spending on marketing and ratcheted up innovation, including Dip & Squeeze ketchup packs. Heinz boosted sales to $11.7 billion in fiscal 2012, a gain of 8.8 percent from the year before.

“Johnson took Heinz back to basics and turned it around,” said Nancy Koehn, a professor at Harvard Business School in Cambridge, Massachusetts. “In the years before he took charge, performance slid.”

Johnson worked at Ralston, Frito-Lay and Anderson-Clayton Foods before joining Heinz in 1982 as a general manager of new business. In 1988, as head of the poorly performing Heinz Pet Products, he revived the business. Four years later he did the same thing at Starkist Foods. Johnson was named president and chief operating officer in 1996.

Not a bad paycheck for turning the company around. But the WSJ also gave credit to activist shareholder Nelson Peltz:

Heinz wasn’t always considered a top-operating food company. The company’s shares had languished for years before 2006, when activist investor Nelson Peltz won a board seat for himself and a friend following a lengthy and bitter proxy fight.

Mr. Peltz, whose Trian Fund Management LP had taken a roughly 5% stake in the company, criticized Heinz for spending too much on supermarket promotions and not enough on marketing its brands. Since then—but before Thursday’s news—Heinz shares had risen more than 44%. The company has posted 30 consecutive quarters of revenue growth. Trian now owns less than 1% of Heinz shares.

The food company has been increasing its overseas footprint in recent years through acquisitions, including that of Foodstar, a Chinese soy sauce maker. Heinz in 2011 also took an 80% stake in the Brazilian company that makes Quero brand condiments, which almost doubled Heinz’s sales in Latin America in the first full year. Heinz also has been introducing more of its brands to emerging markets, including its infant formula to China.

Buffett lending his name to the deal gives it the sheen of success, but only time will tell if it will be a good investment.