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Berkshire and 3G Capital in a $23 Billion Deal for Heinz

15 February 2013

(NYT DealBook) Just days ago, the fate of a 144-year-old American icon was being hashed out in a Pittsburgh conference room as executives spoke by phone to representatives of two global billionaires who went by the code names “Owl” and “Goose.”

Owl was Warren E. Buffett, chief executive of Berkshire Hathaway and one of the most admired investors in the world. Goose was Jorge Paulo Lemann, who became one of Brazil’s wealthiest financiers with 3G Capital. What emerged from the talks was a $23 billion takeover of H. J. Heinz, the maker of Heinz ketchup.

The announcement of the deal on Thursday and the involvement of the closely followed Mr. Buffett served as confirmation that deal-making spirits have revived in corporate America.

Yet the deal also signals the rising power of investors from once-emerging markets like Brazil. Armed with strong balance sheets and a growing domestic economy, Brazilian entities have emerged as prominent buyers of American companies like Pilgrim’s Pride, the chicken producer. 3G itself bought control of Burger King two years ago, leading an effort to revive the fortunes of the fast-food chain.

In some ways, Heinz fits Mr. Buffett’s playbook almost to a T. Its global brand recognition approaches that of Coca-Cola and I.B.M., two companies in which he owns big stakes, and its financial performance is sound. Over the last 12 months, its stock has risen nearly 17 percent.

Born from Henry J. Heinz’s horseradish business, Heinz has become one of the best-recognized food companies in the world, with its bottles of deep-red ketchup sitting on millions of kitchen tables. But it has expanded its offerings to include Ore-Ida French fries and Lea & Perrins Worcestershire sauce.

For the year ended Oct. 28, the company reported $11.6 billion in revenue and $1 billion in profit. 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.

“It is our kind of company,” Mr. Buffett told CNBC on Thursday. It fits comfortably alongside companies that Berkshire already owns, including the Dairy Queen chain. But Berkshire and 3G are paying a healthy price for Heinz. Under the terms of the deal, they will pay $72.50 a share, 20 percent higher than the stock’s closing price on Wednesday and 19 percent higher than its record high. Including debt, the transaction is worth $28 billion.

The deal deviates from Mr. Buffett’s playbook in several ways. For example, the day-to-day operations of Heinz will be in the hands of 3G.

“Heinz will be 3G’s baby,” Mr. Buffett said on CNBC.

Also, Berkshire is splitting ownership of Heinz 50-50 with 3G, with each company putting in about $4 billion in cash. Mr. Buffett will pay an additional $8 billion to receive preferred shares, which will pay him a hefty annual dividend of about 9 percent.

The rest of the deal will be financed with debt arranged by banks.

In some respects, the transaction more closely resembles a leveraged buyout, a type of deal that Mr. Buffett has criticized in the past.

But he and Mr. Lemann insist that they intend to hold Heinz for the long term, whereas in a private equity deal, the buyers inevitably seek to profit by selling their acquisition. Mr. Buffett said that he regarded the food company as a trophy asset like Fruit of the Loom or the Burlington Northern Railroad, and would love to buy more control over time.

“We may increase our ownership if any members of the 3G Group ultimately want to sell out later,” he said in a telephone interview.

Mr. Buffett, 82, says he has studied Heinz as a potential takeover target for years, keeping a file on the company as far back as 1980. For years he heard tales of the ketchup maker from one of its former chief executives, Anthony O’Reilly, at the house of the former Washington Post publisher Katharine Graham.

Still, he didn’t breathe a word of his interest to outsiders, and never visited Heinz at its longtime corporate headquarters in Pittsburgh.

He did not make the first move. The roots of Thursday’s deal lie with 3G, whose principal backer is Mr. Lemann, a former Brazilian tennis champion who has since become one of that country’s wealthiest men through years of shrewd deal-making.

The two men have been friends for decades, having served on the board of Gillette, and both are big investors in the brewer Anheuser-Busch InBev. At a corporate retreat for the brewer’s executives in early December, Mr. Lemann approached Mr. Buffett with the idea of taking Heinz private, and quickly got his support.

Mr. Lemann took Heinz’s longtime chief executive, William R. Johnson, out to lunch at the Port Royal Club in Naples, Fla., later that month. At the time, Mr. Johnson thought the meeting was about forming a deeper partnership with Burger King, and no deal was discussed.

It wasn’t until last month that Mr. Lemann formally approached Mr. Johnson with a proposal to buy Heinz, and work began in earnest two weeks ago.

To keep matters confidential, 3G and its advisers refrained from flying to Pittsburgh, instead holding negotiations through phone calls and video chats.

Maintaining Heinz’s ties to Pittsburgh was important to Mr. Johnson, and the buyers assured him that the company would remain headquartered there.

As part of the code for the deal talks, Heinz executives referred to their company as “Penguin,” a nod to the hockey team in Pittsburgh. But advisers to Mr. Buffett and Mr. Lemann, having a hard time remembering the nickname, stuck with the bird theme and called the company “Hawk” instead.

The negotiations moved quickly, with Mr. Buffett poring through Heinz’s financial statements himself. He and Mr. Lemann initially offered to pay about $70 a share last month, according to people with direct knowledge of the process. After some back and forth with Mr. Johnson and his advisers, the suitors eventually raised their offer to $72.50.

As the final terms of the deal began to fall into place this week, Mr. Buffett invited Mr. Johnson and 3G’s chief executive, Alexandre Behring, to lunch for the first time. Over burgers at the Hilton in his hometown, Omaha, Mr. Buffett noted that Heinz was started in 1869, the same year that his great-grandfather Sidney founded a grocery store.

Unable to resist tweaking his guest, Mr. Buffett recalled that while Heinz ran into financial trouble briefly in the late 1800s, his family’s business had fared better. “So for a little bit of time, we were ahead,” he recalled in an interview on Thursday.

The talks concluded in the wee hours of Thursday morning. Exhausted, 3G executives and their advisers celebrated the imminent closing of their deal in suitable fashion: over Whoppers and fries from Burger King, surrounded by piles of Heinz ketchup packets.