Heinz purchase – biggest in food industry history?

Heinz purchased by Warren Buffet and Jorge LemannThe £18 billion purchase of Heinz, which some commentators claim is the biggest in the food industry’s history, has seen US investor Warren Buffet’s Berkshire Hathaway firm team up with Jorge Lemann, Brazil’s second richest man.

It’s believed that Buffett will come up with around £8 billion, with the rest of the cash coming from Lemann’s 3G Capital investment company and loans from Wells Fargo and JP Morgan banks. The deal is expected to be finalised in the third quarter of 2013, subject to shareholder and regulatory approval. At present, it’s not been confirmed who’ll lead Heinz in its new era. 3G MD Alex Behring said no decisions had been taken over the future of Heinz chief executive Bill Johnson, who’s been in charge since 2000. At the press conference, Behring reported that it’s too early to talk about cost cutting measures, management changes, jobs or synergies, but stressed that 3G is interested in ‘long-term value creation’.

World’s best known brands 

Heinz UK and Ireland’s main food manufacturing facility is based in Kitt Green, near Wigan, and turns out more than one billion cans of beans every year, snapping up the position of Europe’s largest food factory. The firm also has manufacturing sites in Telford, Worcester, Westwick, Kendal and Dundalk in Ireland.

Buffett and Lemann have already bought some of the world’s best known brands, which have the potential for further growth in developing regions. While Heinz generates the largest proportion of its sales in Europe, it’s its North American consumer goods arm that’s the most profitable. However, sales in China have been soaring and it’s believed there will now be an increasing focus on the Asian markets. Analysts state that the deal could be the first step in a broader wave of mergers for the food and beverage industry.

‘Maybe for the consumer staples group in general, this may start some talk about consolidation. Even corporate entities are flush with cash, interest rates are low, it would seemingly make sense,’ comments Jack Russo from Edward Jones.

‘The move make strategic sense for Heinz, as it’s likely to undergo more restructuring and portfolio change,’ adds Alexia Howard from Sanford C Bernstein & Co.

While Heinz has seen some good growth in frozen breakfast products and snacks, its Smart Ones frozen entrées have not performed as strongly in recent years. Asked about the business at Heinz’s latest (Q2 2013) earnings call, Johnson reported that ‘the category over the last five years has lost 20 million cases, about ⅓ of the total category volume’.

‘Investors have begun to wonder whether the company should dispose of the troubled frozen business in the US and expand exposure to the faster growing baby food category in developing markets,’ states Howard. ‘Since the dividend pay-out was such an important feature of the investment case for Heinz, disposing of the frozen business while still a public company would have been problematic. As such, the move to private ownership could facilitate more restructuring and the sale of one or more of its businesses.’

Frost & Sullivan’s Global Food & Agriculture research programme manager Christopher Shanahan maintains that, while Heinz’s growth hasn’t set the world on fire, it has a strong position in some high-growth emerging markets and represented a good long-term bet.

‘Investing in a good food company that has shown healthy growth during the last several years during the economic recession is smart because they can hedge this bet in case a disruptive event occurs – therefore, Berkshire Hathaway will be better equipped to offer a more certain return on investment to its clients,’ states Shanahan.

Business as usual

UK union, Unite, is seeking assurances that the jobs of its 3 000 members are secure.

‘While we recognise the commitment given by Berkshire Hathaway that it will be  ‘business as usual’ at Heinz, the 3 000 Unite members who work for the company in the UK will want more detailed assurances that their jobs and sites will remain secure,’ states Unite national officer Jennie Formbie. ‘Unite is seeking a meeting with senior management to allow us to explore in greater detail what impact, if any, this acquisition will have for the UK business.’