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Author: murdockvdk One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 213753  
Subject: Distilling Heinz Date: 2/24/2013 12:03 PM
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Afternoon – My intention is to outline what we know about the acquisition of Heinz to highlight the unanswered questions that we should be aware of – If I have a spare moment perhaps we can also get to some rampant speculation.

Equity – both Berkshire and 3G are offering up 4.4 billion for 50% equity stakes in the new Heinz entity.

Preferred shares – Berkshire is being given 9% on 8 billion dollars in preferred shares – or 720 million dollars a year before taxes (2 million dollars a day) – I saw it posted that this would be a net 670 million after taxes.

Let’s leave aside the argument about what the total yield on the deal is with the understanding that we’re getting 670 million a year an equity kicker on our 12.4 billion dollars – 5.4% or so – given what I’m earning on my personal emergency fund money I would say that this is about a 668 million dollar a year improvement for Berkshire over what cash is paying. (Note that this is only a very slight exaggeration)

Warrants – we have no idea what the terms of the warrants will be so a big asterisk here

Debt – there is leverage being employed here and I’ve very interested to see what the interest rate of this debt ends up being (I have not seen this posted anywhere – if it has please correct me – I think Mungofitch posted that the current Heinz debt is trading at 3.6%)

Impressions – it is a lot of money to spend on ketchup but it is the only ketchup that I use – the private label ketchup I sometimes see when I’m out is dreadful

Remaining questions from above
What is 3G receiving to run the company?
When can the preferred shares be called?
What is the Tax rate that Berkshire will pay on the preferred and is there a danger of this changing? (Think tax reform or some other change)
What are the terms of the warrants?
What interest rate is the new entity forced to pay for debt financing?

Rampant speculation

I’ve been trying to figure out what the relationship between Berkshire and 3G will look like over time. Just for the sake of thinking out loud

Berkshire
1. MidAmerican – over time Buffett increased ownership as the company bolted on new operations and by bolted I mean bought giant utilities not adding on little companies to a larger parent
2. Lots of Berkshire affiliates make bolt on acquisitions – we know this
3. I find myself thinking about the Marmon deal and the somewhat novel approach to buying the company out

3G
1. They took away my Bud shares! But at the same time they created a giant company that apparently runs very efficiently. Most of what I’ve heard about volume dropping in some of their major brands seems to be the result of moving consumers into higher margin products. Bud Lite to Bud Lime etc.
2. I guess I don’t know a whole lot about 3G beyond the Beer and Burger King… some opportunity here for me to learn something

Buffett had quite the reaction to the Kraft treatment of the frozen pizza operation; it really stuck out to me. He was angry! Or at least as angry as Warren publicly gets, normally he would only praise individually and criticize generally. I wondered at the time if he would have been a buyer of the operation if he had a vehicle to attach it to. (Assuming of course that the pizza operation itself was too small to be a stand-alone company)

http://www.cnbc.com/id/34961653

I could only find some links to text but not the actual interview, the above link goes to part 3 of the CNBC interview where he deals with Kraft.

Small Quote
“And unfortunately they headlined the $3.7 billion. I don't think I've read anyplace about the fact that they're only getting $2.5 billion. And it was Nestle that pointed out that this business does $2.1 billion in sales and makes $280 million. And giving up $280 million of earnings in a business that's been growing over the years for $2.5 billion of cash, I think, is a big mistake and I think it's a bigger mistake when you're paying -- probably counting all of the costs involved including the undervaluation of the Kraft shared given, you're probably paying in the range of maybe 17 times earnings for Cadbury, I think is a big mistake.”

So with that said I wonder if the undisclosed Warrants hold the secret to the Heinz deal (a thread just above asks the question why didn’t Berkshire just buy Heinz) Perhaps (this section is labeled rampant speculation so you’ve been warned) the Warrants are structured to institutionalize the behavior we’ve witnessed in MidAmerican and that 3G has been working on creating Bud.

Bear with me

3G and Berkshire partner on Heinz and create a vehicle to acquire additional boring has heck food companies. (Mars please!) As each part is bolted on Berkshire provides a portion of the financing and its considerable reputation in return for a larger equity stake a growing pie and a fair return on its capital. 3G has a smaller equity stake at each turn but of a much larger whole.

A boy can dream.

Risks

Group project – how does this sucker blow to into a thousand pieces? You can pick either while the deal is being done or after the deed is done.

A. Maybe the rogue options trader was actually a key member of one side or another’s management team.
B. Current Heinz shareholders revolt (There is a lawsuit but there is always a lawsuit and how many people are going to complain about getting 20% above the all-time high?)
C. The trend towards private label continues and Heinz starts to lose market share leading to a loss of pricing power as management tries to cut prices to keep volume up
D. Combine C with a dramatic rise in raw material pricing (Tomato Famine! Sugar Wars!)
E. Food tastes change - http://boards.fool.com/the-ketchup-conundrum-30541952.aspx … Thanks to ratehunter for finding that New Yorker piece from way back – it’s an interesting read but I would note that it has not set the world on fire like Grey Poupon did.


Ok… thoughts?

Tom
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Author: DavidAnglin Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199056 of 213753
Subject: Re: Distilling Heinz Date: 2/24/2013 11:10 PM
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Heinz is more than ketchup... but the encouraging thing is that WEB thinks well of 3G and that he will welcome new ideas from them. 3G (assuming that they will be reliable operators and caretakers) can be the outsourcing operators for lots of new acquisitions.

If WEB can find someone good to do the operations and take things like Heinz private as often as 3G finds good things, then

why does he need someone like Sokol to fix operations problems... 3G can do it.

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Author: jkm929 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199062 of 213753
Subject: Re: Distilling Heinz Date: 2/25/2013 10:38 AM
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E. Food tastes change

Numbers from 2010.

What’s America’s favorite condiment? Hint: it’s not ketchup.

The answer is mayonnaise: specifically Hellmann’s, which the nation apparently slops on everything except french fries.

Hellmann’s alone accounted for $401.2 million in sales last year, according to Businessweek -- nearly a third of the total $1.3 billion mayo market here.

Heinz Ketchup is a distant third with $278.6 million in sales, edged out by the $286.2 million worth of Tostito’s salsa sold last year.


http://www.nypost.com/p/news/national/condiments_mayo_clinic...

jkm929

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Author: WuLong Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199065 of 213753
Subject: Re: Distilling Heinz Date: 2/25/2013 11:12 AM
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Not that that really changes the marketin demographics, but...

mayonnaise: I can make my own, better. In fact, I can make baconnaise.
salsa: Ditto.
Ketchup is tough to make at home and get right.

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Author: BandonDunes Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199066 of 213753
Subject: Re: Distilling Heinz Date: 2/25/2013 11:25 AM
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Mayonnaise is nothing more than artery glue:)

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Author: murdockvdk One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199090 of 213753
Subject: Re: Distilling Heinz Date: 2/25/2013 7:57 PM
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Thank you, for your responses – I’m finding the process of writing something to be better than just ruminating to myself like I normally do.

David you bring up to very important points

“Heinz is more than ketchup”

This is very true – I’m impressed by the portfolio – I didn’t know the depth of it.

Classico Pasta Sauce, Ore-Ida, Smart Ones from Weight Watchers – and then a bunch of stuff I’ve never heard of – clearly I’m not spending enough time in supermarkets (This is a joke for my DW, I’m the only one who goes to the super market)

“why does he need someone like Sokol to fix operations problems... 3G can do it.”

Aha! This has crystalized a thought that was floating around in my noggin and I couldn’t get out.

When Sokol was working for Berkshire he was mister fix it – from outside the company many had thought of him as the person in the envelope to replace Warren. He did a great job! He responded to questions at the annual meetings! And then things went wrong in a hurry. I actually was away on vacation and was trying to write a list of risks that Berkshire faced. Included in that multipage risk was one line; Key man risk. When I got to an airport on my way home I looked at a screen and it said “….remaining fallout from the Sokol affair…” and I decided that the list I came up with on the Leto deck could be tossed out.

Based on the above I am hopeful – if 3G can do some of the things Sokol could do maybe there is hope for continued deployment of the cash hoard, especially if 3G is in on what’s going on.

This also fills me with some dread – the Sokol breakup was a pain – but when you fire someone it’s a fairly well-trod road as to how that works out.

What happens when you have a divorce with an entity who owns half of an enormous enterprise? Half of Heinz – or if we’re dreaming Half of Heinz plus whatever you’re able to stuff into it over the course of 5, 6 or 10 years. That will keep you up at night.

This brings us to the other side of the coin – what if 3G gets the hook? This is a highly leveraged deal, we have no idea the state of the 3G balance sheet – they could get the investment bank equivalent of a margin call and need to exit stage right.

So – additional questions

Have the terms of a divorce between Berkshire and 3G been codified ahead of time?

Jkm929
Thanks for the link!

Does anyone know if there is a way to get annual sales for this category? I’d be interested in creating a spreadsheet to see the trend in the sector.

I would look for myself but I’m stuck on the phone with someone. And it seems it’s going to take a while.

WuLong
I demand your recipe and source for both your baconnaise and salsa recipe

There… I said it =P

Thanks
Tom

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Author: commoncents33 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199112 of 213753
Subject: Re: Distilling Heinz Date: 2/27/2013 6:05 AM
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I actually was away on vacation and was trying to write a list of risks that Berkshire faced. Included in that multipage risk was...



Glad I'm not the only one who could consider doing such a thing on vacation. ;-)

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