Warren Buffett's Berkshire Hathaway Inc. and Jorge Paulo Lemann's 3G Capital agreed to buy HJ Heinz Co. for about $23 billion, ending the independence of an iconic ketchup maker that traces its roots to the 1860s.
The buyers will pay $72.50 a share, compared with yesterday's closing price of $60.48, according to a statement today. Berkshire will spend about $12 billion to $13 billion on the deal for the maker of condiments and Ore-Ida potato snacks. The transaction is valued at about $28 billion including the assumption of debt, according to the statement.
Heinz benefits from "very powerful consumer goodwill in the developed markets and a very early start in China and India, two of the largest developing markets," Tom Russo, a partner at Berkshire investor Gardner Russo & Gardner said in a phone interview. "It will not be hard to service the debt."
Buffett, 82, has been seeking deals after the cash pile at Omaha, Nebraska-based Berkshire climbed to more than $45 billion. He has previously wagered on consumer products through equity investments in Coca-Cola Co. and he helped finance Mars Inc.'s purchase of chewing gum maker Wm. Wrigley Jr. Co. Brazil's Lemann, 73, is worth about $19 billion based on holdings in Anheuser-Busch InBev NV and Burger King Worldwide Inc., according to the Bloomberg Billionaires Index.
Heinz shares climbed 20 percent to $72.44 at 12:56 p.m. in New York trading. Berkshire advanced 1 percent.
Consumer stocks including Campbell Soup Co., General Mills Inc. and J.M. Smucker Co. also rallied. Campbell, the world's largest soup maker, jumped 1.8 percent. General Mills, the maker of Cheerios cereal, surged 2.8 percent, and Smucker rose 1.7 percent.
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. The people asked not to be identified because the terms are private.
The deal will also be funded by the rollover of existing debt and debt financing committed by JPMorgan Chase & Co. and Wells Fargo & Co., according to the statement.
The condiment maker, led by Chief Executive Officer Bill Johnson since 1998, had gained 17 percent in the past 12 months as it boosted sales in developing economies. Heinz in November said fiscal second-quarter sales in emerging markets rose 13 percent, excluding the effects of foreign currency fluctuations and acquisitions or divestitures.
Heinz elected billionaire Nelson Peltz to the board in 2006 following a six-month proxy fight. Peltz had been pushing the company to trim costs and sell assets to boost the ketchup maker’s share price.
3G will oversee the operations of the business, Buffett told CNBC, praising the investment company's record with Burger King, which it acquired in 2010 and then took public last year. He said he expects Johnson to remain in charge and that 3G will have the final say.
"Any partnership where I don't have to do the work is my kind of partnership," Buffett said. Buffett is worth more than $50 billion, according to the Bloomberg Billionaires Index.
Buffett and Lemann served together as directors of razor-maker Gillette Co. Buffett resigned from that board in 2003.
Heinz will retain its corporate headquarters in Pittsburgh, according to the statement. The company traces its roots back to 1869, when Henry John Heinz and neighbor L. Clarence Noble began selling grated horseradish, according to Heinz's website. The company introduced its famous Tomato Ketchup in 1876.
The deal is the largest ever in the food industry, the companies said. The buyers are paying about 14.6 times earnings before interest, taxes, depreciation, and amortization, according to data compiled by Bloomberg. That compares with the median of 7.6 times Ebitda in a survey of more than 100 comparable deals worldwide.
"Buffett's affection for strong brand names" makes the company a good fit for his portfolio, said Christopher Growe, an analyst at Stifel Nicolaus & Co. "Heinz's strong margins support robust free-cash flow generation."
There have been more than $280 billion announced deals this year, according to data compiled by Bloomberg. That's 26 percent more than in the same period a year earlier.
Centerview Partners LLC and Bank of America Corp. acted as financial advisers to Heinz, while Davis Polk & Wardwell LLP provided legal counsel to the ketchup maker. The Heinz board committee that approved the deal got financial advice from Moelis & Co. and legal counsel from Wachtell, Lipton, Rosen & Katz.
Lazard Ltd. served as lead financial adviser to the investment group. JPMorgan and Wells Fargo also gave financial advice, and the two banks have committed financing, according to the statement. Kirkland & Ellis LLP provided legal counsel to 3G Capital, while Munger, Tolles & Olson LLP acted as legal adviser to Berkshire.
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