Buffet Adds Some Relish To His Brands

Warren Buffet tossed another haloed brand into his shopping cart yesterday, adding 50% of Heinz to all the other All-American staples he’s backed or owns outright. Buffet’s Berkshire Hathaway and private equity partner 3G Capital, which will be in control of operations at Heinz, will pay a record $23 in billion at checkout and will assume another $5 billion in debt. Berkshire itself is shelling out $12 billion – more than $4 billion in cash -- for its 50% stake.

“This is my kind of deal and my kind of partner,” Buffett tells CNBC’s “Squawk Newsline” in detailing the financial arrangements and explaining why he was willing to pay a 20% premium on the stock price. “Heinz is our kind of company with fantastic brands.”

It started with the 15-year-old Henry John Heinz bottling some horseradish from his mom’s Pittsburgh garden in 1859 and scoring his “first marketing coup,” as the Pittsburgh Post-Gazette’s Patricia Sabatini relates, by “rejecting the customary green glass bottle in favor of clear glass to emphasize the product's purity.”

Heinz launched the forerunner to today’s conglomerate 10 years later, with ketchup added to the menu in 1876. Heinz today owns such iconic logos as Ore-Ida, T.G.I. Friday’s, Weight Watchers and Classico and is a self-described “leader in infant/nutrition, frozen potatoes, frozen entrées, sauces and much more” in more than 200 countries.

“57 Varieties” was added as a marketing hook in 1896. “Although Heinz was manufacturing more than 60 products at the time, Henry thought 57 was a lucky number,” according to a trivia Q&A on the company’s website.

"They’re buying some very good DNA,” Harvard business historian Nancy Koehn tells NPR Marketplace host Kai Ryssdal. “If you think about it this is a brand -- like Fedex or Coke or Starbucks more recently -- that has become the placeholder for the category. If we ask for ketchup and we don't get Heinz -- wherever we are -- there is a little bit of a reboot ... it looks wrong." 

“It looks wrong, right?” Ryssdal agrees. “If it’s not a Heinz bottle, it looks wrong.”

“It looks wrong,” Koehn concurs.

“3G and the Brazilian team that founded it, including co-founder Jorge Paulo Lemann, have succeeded with railroads, banks, beer brewers and fast food restaurants,” writes the Wall Street Journal’s Erik Holm, who points out that Buffett and Lemann once served together on Gillette’s board of directors. 

Buffett "never would have done this deal with a typical buyout shop," Kase Capital hedge-fund manager Whitney Tilson tells Holm. "These managers he is backing are the best operating managers in the world, bar none." 

Holm, whose beat is Berkshire, characterized the deal as a “huge surprise” in an interview with WSJ Live “Market Hub” reporter Paul Vigna. “It came out of nowhere, but when you think about it, it makes a lot of sense.” 

Or did he mean a lot of cents? The point is that Heinz is everywhere, from convenience packets in his desk drawer to pantries around the world. 

“For the year ended Oct. 28, the company reported $11.6 billion in revenue and $1 billion in profit,” write the New York Times Michael J. de la Merced and Andrew Ross Sorkin. “It generates a majority of its sales in Europe, but its Asian markets are growing quickly. And it has improved its net sales for eight consecutive fiscal years.”

The Times reporters reconstruct some of the intrigue surrounding the making of the deal, which dates back to Lemann taking Heinz CEO William R. Johnson to lunch in Naples, Fla., in December, purportedly to discuss firming up the relationship between 3G’s Burger King holding and Heinz. Details include the code names for Heinz (initially “Penguin,” later “Hawk”), Lemann (“Goose”) and Buffet (“Owl”), the wizened crony of Lemann who, it turns out, has had his eyes on Heinz since 1980. 

Heinz CEO Johnson (code name undetermined but “Golden Eagle” might be apt) could “reap about $100 million from the company’s buyout,” according to Bloomberg News’ Renee Dudley, Carol Hymowitz & Leslie Patton. Buffett said he hoped Johnson would remain CEO, they report, but pointed out that it’s ultimately 3G’s decision. “In a conference call after the deal was announced, Johnson said he was ‘way too young’ to retire,’” they report, though that doesn’t necessarily commit him to Heinz long term. 

Analysts generally credit Johnson with turning a sleeping giant around since he took the reins in 1998.

As a sidenote, the New York Times’ Ben Protess suggests the deal was perhaps not surprising enough to some traders. He advances a Bloomberg report that the Securities and Exchange Commission has opened an insider trading inquiry centering on heightened activity in Heinz’ options trading as the deal neared completion Wednesday.

Tags: food, m&a
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