After sitting on cash and not making any major acquisitions since Lubrizol, Warren Buffett’s Berkshire Hathaway (BRK.A) teamed up with 3G Capital (former acquirers of Burger King) to purchase Heinz (HNZ) for a whopping $28 billion, or $72.50 per share—a 20% premium to the previous day’s closing price. The two firms will each own 50% of the venture, meaning Berkshire only invested $14 billion, so there’s plenty of cash left for more acquisitions. According to Buffett, 3G will run Heinz, while Berkshire will be an equal partner and finance part of the deal for 3G.
Buffett had a fantastic quote to sum up the deal, saying:
“I’ve got one word for you: ketchup.”
Although organic attacks have come from every angle (people have challenged the healthfulness of ketchup due to high fructose corn syrup, and competitors continue to underprice Heinz ketchup in the market), the firm has been able to grow market share, sales, and earnings relatively uninterrupted. Fundamentally speaking, Heinz has been one of the strongest businesses in the US for some time. This looks like a classic Buffett deal in the sense that he acquired an incredibly popular brand name, where the future looks like a lot like the past—slow, steady growth.
As for valuation, we think the consortium paid too much. We think the Oracle knows that a 19 times 2013 earnings multiple is rich, even for a company with such classically reliable growth and a powerful brand name, but there was likely no chance 3G and Berkshire could have acquired the firm for anything less than a huge premium to the current share price. We think 3G, a Brazilian firm, will also concentrate on globalizing the brand, which could eventually make the purchase price look a little better.
Overall, this deal will not materially move the needle on our fair value estimate of Berkshire, though we’re happy to see the firm put some of its cash hoard to work (even if it paid up a bit for a good business). Looking ahead, Buffett indicated that the company could easily do another big deal this year, which we’re optimistic will be accretive to Berkshire shareholders. All things considered, we think Heinz shareholders got a fantastic deal, and we’ll be watching closely as Berkshire “squeezes” economic value from this transaction down the road.