Heinz deal highlights Warren Buffett's favorite strategies - Omaha.com
Published Friday, February 15, 2013 at 12:00 am / Updated at 12:21 pm
Heinz deal highlights Warren Buffett's favorite strategies

Infographic: How well do you know your condiments?

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Warren Buffett's latest deal, an agreement with 3G Capital to buy H.J. Heinz Co., highlights three of the billionaire's favorite strategies: betting on snack foods, investing in companies he trusts others to manage, and locking in above-market fixed returns.

Jorge Paulo Lemann's 3G will run the maker of condiments and Ore-Ida potato snacks after the $23 billion deal, even as Buffett's Berkshire Hathaway Inc. commits more than $12 billion for equity and a preferred stake.

About H.J. Heinz Co.

Is an $11.6 billion global company. Its profit in fiscal 2012 was $923.2 million.

Sells 650 million bottles of ketchup every year, claiming more than 50 percent of market share in the U.S., about 80 percent in the U.K.

Is about more than ketchup. The company has 15 brands that account for more than two-thirds of its annual sales. Other brands include Ore-Ida potato products, Classico sauces, Bagel Bites mini pizzas, Weight Watchers' Smart Ones entrees, TGIFriday's snack foods and Plasmon infant nutrition products.

Sells in 200 countries around the world and, in more than 50 of the countries, has the No. 1 or No. 2 market position.

Employs about 32,000 people around the globe.

Was founded in Sharpsburg, a suburb of Pittsburgh, in 1869 by entrepreneur Henry John Heinz.

Ketchup wasn't the company's first product. That was horseradish, sold in glass bottles intended to show off its quality. The pickles featured in the company's “57 Varieties” logo also preceded the company's signature ketchup.

See a list of Berkshire Hathaway subsidiary companies

Buffett helped finance Mars Inc.'s purchase of Wm. Wrigley Jr. Co. in 2008 for about $23 billion and controls the largest stock holding of Coca-Cola Co. Berkshire also owns See's Candies and ice-cream company Dairy Queen.

Heinz “just comes to mind as almost synonymous with ketchup, just as Coca-Cola is almost synonymous with soda,” said David Kass, a professor at the University of Maryland's Robert H. Smith School of Business.

Buffett has said that while he struggles to assess the long-term prospects of technology companies, he has more confidence in established brands of treats that can benefit from expanding sales outside the United States.

“More people will be drinking Coca-Cola 10 years from now, or chewing Wrigley's gum,” Buffett told Bloomberg Television's Betty Liu in an interview last year. “I know that.”

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.

Buffett said Thursday that Berkshire will still have room to make more acquisitions, noting that its businesses continually replenish its cash supply.

“Anytime we see a deal is attractive and it's our kind of business and we've got the money, I'm ready to go,” Buffett said.

Buffett will leave Heinz oversight to 3G, he told CNBC Thursday.

The billionaire wrote in 1999 that he and Vice Chairman Charlie Munger delegate responsibility to the heads of operating units “almost to the point of abdication.”

Ketchup capital?

Does the involvement of Warren Buffett's Berkshire Hathaway in the purchase of H.J. Heinz make Omaha the ketchup capital? Yes and no.

It's true that Heinz dominates ketchup sales in the U.S. and many parts of the world (more than 50 percent of the U.S. market).

It's true that third-ranked Hunt's ketchup is a brand of Omaha-based ConAgra. (Private label ranks second.)

And it's true that Berkshire's share of the mega Heinz deal — $12.12 billion — gives it part ownership plus a preferred investment that pays 9 percent a year.

But this deal is a departure for Buffett, who usually buys entire companies.

He said Thursday on CNBC that his partner in the deal, Jorge Paulo Lemann's 3G Capital, will run Heinz. Its headquarters will remain in Pittsburgh.

It's not clear whether Omaha-based Berkshire will count Heinz's 32,000 global employees as part its empire. Berkshire doesn't, for example, count the employees of Coca-Cola, where Buffett has a large stake.

(In case you're wondering, ConAgra ranks 215th in the Fortune 500; Heinz ranks 244th.)

Buffett wrote in 2010, after striking a deal with Leucadia National Corp. to establish Berkadia Commercial Mortgage LLC, that he favors deals where partners run joint investments. He praised Leucadia executives Joe Steinberg and Ian Cumming for a “terrific experience” in an earlier venture when they bought Finova Group Inc., a Scottsdale, Ariz.-based lender.

Warren Watch: More World-Herald coverage of Buffett and Berkshire Hathaway

“Joe and Ian did far more than their share of the work, an arrangement I always encourage,” Buffett said in a letter to shareholders. “Naturally, I was delighted when they called me to partner again.”

Buffett and Lemann served together as directors of razor-maker Gillette Co. Buffett resigned from that board in 2003. Lemann has also invested in consumer products, with bets on brewer Anheuser-Busch InBev NV and Burger King Worldwide Inc.

“Possessing a powerful worldwide brand is essential for sustained success” in some lines of business, Buffett wrote in his annual letter to shareholders in 2008, explaining his preference for companies with a “moat” protecting them from competitors. “Long-term competitive advantage in a stable industry is what we seek.”

The Heinz transaction also shows how Buffett likes to lock in fixed returns from preferred stakes on the same deals in which he gets the chance for greater growth through equity bets. Buffett got preferred shares and warrants to buy stock after he injected funds in Goldman Sachs Group Inc. in 2008 and Bank of America Corp. in 2011.

Berkshire got $4.4 billion of 10-year bonds paying 11.45 percent as part of the 2008 Wrigley deal in which the company also acquired $2.1 billion of 5 percent preferred stock.

The Heinz preferred shares provide a “phenomenal rate, and I think it's relatively trustworthy,” said Meyer Shields, an analyst at Stifel Nicolaus & Co. “Any other company that could put out $12.4 billion would gain access to similar returns, but there aren't that many of them.”

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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