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Under new management

February 21st, 2013

One of America’s most loved brands recently became the target of a major acquisition this past Thursday. Warren Buffet’s Berkshire Hathaway joined forces with the Brazilian private equity firm 3G Capital to purchase Heinz. The deal is the latest of the trend of massive deals on Wall Street this month, with a total value of $23 billion, $28 billion including debt.  The deal calls for the purchase of all shares at a price of $72.50.

The acquisition fit both the interests of Buffet and 3G. In 2010, 3G purchased Burger King for $3.3 billion, a frequent purchaser of Heinz ketchup. With Heinz, 3G could potentially leverage it into other food industry deals. Buffet wanted in for other reasons, following his mantra of “only investing in what you know.” Buffet has been involved in other major transactions with firms such as Mars, Geico, IBM and many others. When the opportunity to take stake in a quality American brand arose he was quick to jump. Despite spending billions on the Heinz deal, he is still hungry, as he joked that he has “an ‘elephant gun’ to hunt for deals and warned that his ‘trigger finger is itchy.”

This transaction is unique because of the difference in the acquiring parties’ investing styles. Buffet tends to be a very hands-off, laissez-faire type of manager. This is the polar opposite of the nature of most private equity firms, that have a much more aggressive approach.

For example, when 3G purchased Burger King, almost immediately they found a new CEO, cut jobs, closed stores and went ahead with many other restructuring initiatives. Yet their strategy worked. But despite this 3G was able to create more profit and make Burger King even stronger.

Heinz isn’t necessarily destined to have the same fate. Over the past five years, the firm has cut costs under its own management, reducing SGA costs from 23 percent of sales in 2006 to 21.2 percent in 2011.  The firm has also done a great job of expanding its global footprint with  its own acquisitions. Some of the more noteworthy of these include the Chinese soy sauce producer, Foodstar, and Quero brands, which created a stark increase in Latin American sales. Heinz’s CEO, William Johnson, is dead-set on keeping the company headquartered in Pittsburgh, saying it is non-negotiable.

There are only a few changes that may occur in Heinz’s future under its new management. Although keeping Heinz in Pittsburgh is a lock, those who run it are not entirely safe. 3G will almost certainly find ways to make the business more efficient, and one of the ideas that has already arose is streamlining the company operating segments.

These include sauces, frozen foods and infant nutrition. Look for 3G to devise a way to make these product lines work better together. The deal is not quite final yet, as shareholders and regulators still must approve it.

Information from The Wall Street Journal was used in this report.