Heinz moves closer to cementing buyout funding

Thu Mar 21, 2013 4:01pm EDT

March 21 (IFR) - Ketchup giant H.J. Heinz took more key steps Thursday toward funding its $28 billion acquisition by 3G Capital and Warren Buffett's Berkshire Hathaway, moving to an all-dollar loans package while drumming up huge demand for a new bond issue.

As Heinz tries to cement another piece of funding for the largest buyout in the history of the food industry, bankers said the company had dropped plans for euro- and sterling-denominated loans due to strong demand from US investors.

The new and simpler all-dollar structure reportedly disappointed many European bankers and investors keen to get a piece of one of the most spectacular leveraged buyouts (LBOs) in recent years.

"The view is that it is the most efficient, easiest and cleanest way - to issue in one currency," a banker said.

The original loans package consisted of a $1.5 billion revolving credit facility and $10.5 billion in term loans split into a six-year term loan B1 tranche and a seven-year term loan B2 tranche.

It was not immediately clear if that structure would be maintained. The term loans had been planned to include an $8.5 billion dollar-denominated loan, as well as up to $1.4 billion in euros and around $600 million in sterling.

There has reportedly been massive demand for paper on the deal, which brings together one of the world's most iconic investors in Buffett and a company that is a household name in many corners of the globe.

It also brings in Burger King's majority Brazilian owner, private equity firm 3G Capital, which Buffett announced would run the Heinz business after the buyout.

"Investors like that 3G has been successful in the Burger King buyout, and Buffett being involved is a huge positive," one bond investor said.

MANY PIECES TO THE PUZZLE

Berkshire Hathaway and 3G Capital are buying Heinz for $72.50 per share, a 19 percent premium to the company's previous record high stock price at the time the deal was announced in mid-February.

Including debt assumption, Heinz valued the transaction at $28 billion.

JP Morgan and Wells Fargo are joint bookrunners for the loans financing, while sub-underwriting banks on the deal include Banco do Brasil, Barclays, Citigroup, HSBC, Itau Unibanco, RBC, UBS and others.

Lender commitments are due at midday on Friday.

In addition to the loans, Heinz also plans to roll over some existing debt not covered under change of control provisions.

Total equity investment in the transaction is $16.24 billion. Berkshire Hathaway is committing $12.12 billion - $8 billion preferred (9% dividend) and $4.12 billion common equity. 3G will invest US$4.12bn in common equity.

Meanwhile Heinz is also selling $2.1 billion in second-lien notes to refinance a second-lien bridge loan.

Investors said the B1/BB- rated bond issue, which prices on Friday, has been a blowout, with massive demand that has allowed Heinz to shave more than a full percentage point off of pricing expectations, to official guidance of 4.5% area from initial price thoughts of 5.75%.

While that rate has been roughly typical of Double B-rated bond deals in recent weeks, it's certainly not the norm to see debt being used to fund an LBO that prices with such a low coupon, or rate of interest.

"This is being priced like a very strong non-LBO Double B bond," said the bond investor. "There is definitely an intangible glow around this deal."

But he cautioned: "In my view, it's still a highly leveraged transaction."

BUFFETT 'CONFIDENCE'

Order books on the bond deal - structured as a 7.5-year non-call two second-lien senior secured deal - were to close at 5pm New York time on Thursday afternoon. Wells Fargo, JP Morgan, Barclays and Citi are joint bookrunners on the trade.

In the run-up to the deadline, Heinz on Thursday issued a supplement to its preliminary bond offering memorandum saying that Berkshire Hathaway, through Berkshire Hathaway Assurance Corporation, may offer bond insurance separately to holders of the new Heinz notes.

A market source said the insurance could be in the form of credit default swaps (CDS).

"I think he's doing this because he's got a lot of confidence that it's a solid deal," the investor said. "And the more Buffett commits, the more investors love it. It's like a seal of approval."

Even so, Heinz's credit ratings were hit by the transaction.

Fitch immediately downgraded Heinz from investment-grade to junk bond status when the deal was announced in February, dropping it to BB+ from BBB+. Last week it downgraded Heinz again to BB- from BB+.

S&P plans to lower the rating to BB- after the buyout is completed.

Moody's rates the corporate family at Ba3, which reflects the high degree of leverage from the transaction of roughly 6.3x debt/Ebitda, although if including the US$8bn of preferred stock that is being bought by Berkshire Hathaway, that would rise to 10 times.

Moody's said cash flow metrics are weakened by high interest expense and at least US$720m of dividends, which it assumes will be upstreamed annually to service the 9% parent company preferred stock issued to Berkshire.

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