UPDATE 8-Buffett, Brazil's 3G team up for $23 bln Heinz buyout

Thu Feb 14, 2013 4:31pm EST

* Paying $72.50 per share for Heinz
    * Buffett says Berkshire putting up $12 bln-$13 bln cash
    * Price is a 19 pct premium to Heinz pvs all-time high
    * Heinz shares soar 20 pct

 (Updates to close, adds links)
    By Ben Berkowitz and Martinne Geller
    Feb 14 (Reuters) - Warren Buffett and Brazilian financier
Jorge Paulo Lemann are teaming up to buy ketchup maker H.J.
Heinz Co for $23.2 billion, in what could be the first
step of a wave of mergers for the food and beverage industry.
    Analysts and people close to the deal said Heinz could be a
good starting point to consolidate similar staple food
companies, particularly given the larger ambitions of Lemann's
private equity firm 3G Capital.
    Including debt assumption, Heinz valued the transaction,
which it called the largest in its industry's history, at $28
billion. Buffett's Berkshire Hathaway  and 3G
will pay $72.50 per share, a 19 percent premium to the stock's
previous all-time high. 
    Heinz shares initially rose slightly above the offer price,
although Buffett cautioned he had no intention of raising his
bid and the stock fell back below that mark by midday. The stock
has been on a tear, almost doubling over the last four years,
though analysts said the price seemed fair.
    They also said 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," Edward Jones analyst Jack Russo said.
    Companies like General Mills and Campbell Soup
 - itself long seen as a potential Heinz merge partner -
rose on the news.
                  
 
    
    Any acquisition could help Heinz further diversify and
broaden its international profile. It already dominates the
ketchup business, with a nearly 26 percent share of the global
market and a 59 percent share domestically, according to
Euromonitor International.
    The company actually generates the largest portion of its
sales in Europe, though its traditional North American consumer
products business is the most profitable.
    But its real growth engine has been the Asia/Pacific region,
where sales increased nearly 11 percent in the last fiscal year,
in part on demand for sauces and infant foods in China.     
 
    BUFFETT HUNTING GROWTH
    The surprise purchase satisfies, at least in part, Buffett's
hunt for growth through acquisition. He was frustrated in 2012
by the collapse of at least two unnamed deals in excess of $20
billion and said he might have to do a $30 billion deal this
year to help fuel Berkshire's growth engine.
    In a regulatory filing late on Thursday, Berkshire said it
was providing $12.12 billion in equity, including common stock,
warrants and preferred shares with a liquidation preference of
$8 billion and a 9 percent dividend. 
    Barclays Capital's Jay Gelb the deal's valuation appeared
high at 19 times Heinz's expected 2014 earnings per share, but
that it would  enhance Berkshire's consumer portfolio.
    Berkshire Hathaway already has a variety of food assets,
including Dairy Queen ice cream chain, chocolatier See's Candies
and food distributor McLane. Buffett, famed for a love of
cheeseburgers, joked he was well acquainted with Heinz's
products already and that this was "my kind of deal."
    It does represent an unusual teaming of Berkshire with
private equity, though; historically, Buffett's purchases have
been outright his own. He and 3G founder Jorge Paulo Lemann have
known each other for years, and Buffett said Lemann approached
him with the Heinz idea in December.
    One Berkshire investor said he had mixed feelings about the
deal because of the limited growth prospects domestically.
    "We're a little hesitant on the staple companies because
they don't have any leverage in the United States," said Bill
Smead, chief investment officer of Smead Capital Management in
Seattle. But at the same time, he said, Buffett was likely
willing to accept a bond-like steady return even if it was not
necessarily a "home run."
    A second investor, Michael Yoshikami of Destination Wealth
Management in Walnut Creek, California, said he liked the
purchase because it provided cash flow for other deals.
    "This is a better use of cash than current money market
instruments," said Yoshikami, the firm's CEO and chairman of its
investment committee.

    3G EXPANDS
    For 3G, a little-known firm with Brazilian roots, the
purchase is something of a natural complement to its investment
in fast-food chain Burger King, which it acquired in
late 2010 and in which it still holds a major stake.
    Historically, 3G was more of an investor than an acquirer.
Its biggest shareholdings include Delphi Automotive,
Newell Rubbermaid and Anadarko Petroleum.
    Lemann, a globe-trotting financier with Swiss roots, made
his money in banking and gained notoriety for helping to pull
together the deals that ultimately formed the beer brewing giant
AB InBev. Forbes ranks him as the world's 69th-richest
billionaire, with a fortune of $12 billion.
    3G's Alex Behring runs the fund out of New York. He appeared
at a Pittsburgh news conference on Thursday with Heinz
management to discuss the deal - and to reassure anxious local
crowds that the company will remain based there and will
continue to support local philanthropy.
    But at the same time, Behring said it was too soon to talk
about cost cuts at the company. Unlike Berkshire, which is a
hands-off operator, 3G is known for aggressively controlling
costs at its operations.
    
    PITTSBURGH ROOTS
    Also to be determined is whether CEO Bill Johnson would stay
on. Only the fifth chairman in the company's history, Johnson is
widely credited with Heinz's recent strong growth.
    "I am way too young to retire," he told the news conference,
adding that discussions had not yet started with 3G over the
details of Heinz's future management.
    The company, known for its iconic ketchup bottles, Heinz 57
sauces as well as other brands including Ore-Ida frozen
potatoes, has increased net sales for the last eight fiscal
years in a row. 
    Heinz said the transaction would be financed with cash from
Berkshire and 3G, debt rollover and debt financing from J.P.
Morgan and Wells Fargo. Buffett told CNBC that Berkshire and 3G
would be equal equity partners.
    That would imply roughly $6 billion to $7 billion of new
debt needs to be raised.  
    Heinz shares soared 19.9 percent, or $12.02, to $72.50 on
the New York Stock Exchange. 
    A week ago the stock hit a long-term high of $61 a share -
near records it set in 1998 - having risen almost 5 percent this
year and nearly 12 percent since the beginning of 2012. 
    The Heinz Endowments, a pillar in Pennsylvania philanthropy,
said the sale of the company would have virtually no impact on
their work. Heinz shares represent just over 1 percent of the
endowment's $1.4 billion in holdings.
    The deal is also a potential boon for new U.S. Secretary of
State John Kerry, whose wife, Teresa, is the widow of H.J. Heinz
Co heir John Heinz. Kerry's most recent financial disclosures
from his time in the U.S. Senate show a position in Heinz shares
of more than $1 million, although the precise size is unclear. 
    Centerview Partners and BofA Merrill Lynch were financial
advisers to Heinz, with Davis Polk & Wardwell LLP the legal
adviser. Moelis & Company was financial adviser to the
transaction committee of Heinz's board and Wachtell, Lipton,
Rosen & Katz served as its legal adviser. 
    Lazard served as lead financial adviser. J.P. Morgan and
Wells Fargo also served as financial advisers to the investment
consortium. Kirkland & Ellis LLP was legal adviser to 3G
Capital, and Munger, Tolles & Olson LLP was legal adviser to
Berkshire Hathaway. 

 (Additional reporting by Olivia Oran and IFR's Stephen Carter
in New York and Drew Singer in Pittsburgh; Editing by Maureen
Bavdek and Leslie Gevirtz)