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Thursday, 18 September 2014

Creative pairings

Heinz deal gives taste of new buyout secret sauce

Heinz ketchup is giving markets a taste of private equity’s new secret sauce. Buyout firm 3G Capital is swallowing the condiment king for $28 billion with Warren Buffett’s help. In the past, such mega-LBOs required multiple firms to work. With so-called club deals all but dead, the Heinz takeover shows the new way forward.

Only six weeks ago, the group of Brazilians behind both Anheuser-Busch Inbev and 3G, which owns Burger King, made the pitch to Heinz. The U.S. icon quickly saw the benefits of the more globally-minded Jorge Paulo Lemann and his other fellow Gs, named for the Brazilian Banco Garantia they started together. While growth at Heinz is usually as slow as its ketchup flows, the cash still pours out quickly. Moody’s expects the company to generate about $450 million of free cash flow for the year ending April 30.

Even so, 3G would have been hard-pressed to pull off anything of this scale alone. Lemann enlisted his old Gillette board pal Buffett with a transaction perfectly suited to his burger, shake and value-investing appetite. Berkshire Hathaway is putting in the same $4.5 billion of equity as 3G. The Oracle of Omaha’s conglomerate also could reap a 9 percent dividend from some $8 billion of preferred stock he’s acquiring in the deal.

The arrangement is similar to one being used by Michael Dell to buy his eponymous PC maker. Instead of assembling a roster of private equity firms, as was the norm in the pre-crisis buyout boom, Silver Lake Partners and Dell turned to Microsoft for additional funding. And Dell kicked in some cash from his MSD investment vehicle to go along with his 14 percent stake in the company.

Despite how cheap it is to borrow, more creative pairings probably will be needed if more big public companies are to go private. Buyout firms are understandably reluctant to band together after their investors balked and regulators pried into clubby relationships. Berkshire Hathaway and Microsoft aren’t the only companies with hoards of cash they’d like to put to work. Teaming up with private equity might turn out to be a combination that works as well as ketchup on a Whopper.

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Context News

On Feb. 14 Warren Buffett’s Berkshire Hathaway and private equity firm 3G Capital announced they had teamed up to buy H.J. Heinz for $72.50 per share in a cash transaction valued at $28 billion, including the assumption of $4.5 billion in Heinz debt. Berkshire and 3G will each contribute $4.5 billion in equity. Berkshire will also invest around $8 billion in preferred stock.

On CNBC, Buffett said he expects to spend in total $12 billion to $13 billion on the transaction.

The purchase price represents a 20 percent premium to Heinz’s closing share price on Feb. 13, which was near a record high.

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