TEXT - Fitch says Heinz acquisition adds unfamiliar aspects for Berkshire

Fri Feb 22, 2013 12:20pm EST

Feb 22 - The news of a large acquisition by Berkshire Hathaway (BRK) should
come as no surprise given BRK's large cash holdings and Warren Buffett's
acquisition-laden history. However, it is the deviation from certain past
practices that raise questions with respect BRK's and 3G Capital's recently
announced acquisition of Heinz. The acquisition of Heinz does not change Fitch
Ratings' opinion regarding the credit quality of BRK.  

First, it is unusual for BRK to pair with a private equity firm to make an 
acquisition, mostly because BRK's sizable resources mean few deals would be too 
large to go alone. In fact, Warren Buffett still claims to be in the market for 
another large acquisition.

Second, Mr. Buffett's reputation has long been, and is, as a value investor in 
search of undervalued assets. One could argue the sizable premium above Heinz's 
record high stock price simply does not qualify this as a "value" investment.  

Last, and perhaps most importantly, teaming with 3G Capital to acquire Heinz 
could complicate any exit strategy. BRK has historically been a long-term 
investor, while private equity firms typically have a shorter term investment 
horizon.  

All this begs the question: why didn't BRK make the Heinz acquisition alone?  

Fitch has no inside information to answer this question, but it certainly 
appears this is an acquisition that was initiated and conceptualized by 3G 
Capital. One could argue it shares characteristics of 3G Capital's earlier 
acquisition of Burger King, which proved highly successful.  

The key is that the likely strategic investment play in this case is a 
restructuring of Heinz's operations and financial structure, a skill set 
arguably more greatly possessed by 3G Capital than BRK. BRK's main value-add is,
in turn, their deep pockets and the legitimacy of the deal being associated with
BRK and Mr. Buffet.     

Despite any questions on rationale, the acquisition of Heinz should provide a 
strong and reliable source of income for BRK, which is reflected in Buffett's 
already successful investment track record. During the financial crisis BRK took
preferred equity stakes in a number of financial companies in a liquidity 
crunch, enjoying favorable terms similar to the 9% dividend BRK will receive on 
the $8 billion in Heinz preferred stock. 

Furthermore, Heinz's name brand recognition and strong management team are 
hallmarks of a BRK transaction. Heinz joins other well-known food brands 
existing in BRK's portfolio such as Coca Cola and Kraft. However, 3G Capital 
might not be a typical private equity firm since it publicly discusses its 
strategy of maintaining a meaningful stake in the companies it acquires.