UPDATE 2-Heinz moves to lock up buyout funding

Fri Mar 22, 2013 3:59pm EDT

By Stephen Carter and Caleb Frazier

March 22 (IFR) - H.J. Heinz moved to lock up financing Friday for the biggest buyout in food industry history, slashing the cost of the loan and bond deals funding its $28bn acquisition by 3G Capital and Warren Buffett's Berkshire Hathaway.

Investors and other market sources reported massive demand in the market, allowing the iconic ketchup maker to potentially save hundreds of millions of dollars in financing one of the most high-profile leveraged buyouts (LBOs) in recent years.

Heinz unexpectedly tweaked its funding plan at the last minute on Thursday, dropping the euro and sterling pieces of the term loan package due to huge interest from US investors - and disappointing Europeans keen to get in on the trade.

Instead the company on Friday increased the size of both its new high-yield bond, to $3.1 billion from $2.1 billion, and its dollar-denominated term loans package to $9.5 billion from $8.5 billion.

Demand has been so high that price guidance on the TLB-1 and TLB-2 term loan pieces was reduced by 50-75 basis points (bp) and 25-50bp respectively on Friday. The B1/BB- rated bonds priced at 4.25% in from initial whispers in the market of 5.75%.

"I really don't believe there have been signs of excessiveness in the market, but maybe this is the first sign," James Lee, a senior analyst at Calvert Investments, told IFR.

"When people feel comfortable with an established company, they are willing to lend at very, very low rates."

QUALITY NAMES

Berkshire Hathaway and Brazilian private equity firm 3G Capital, the majority owner of Burger King, are buying Heinz for $72.50 a share, using equity along with the loans and bond to finance the acquisition.

Announced in February, the deal surprised many in the market, not least because that per-share offer price was 19 percent higher than Heinz's all-time peak stock price.

And the additional leverage being used to fund the buyout led Heinz to be immediately downgraded from investment-grade to junk-bond status.

Fitch, the first rating agency to move Heinz down, put them down further to BB- last week.

But Buffett's stature, 3G's food industry track record in the Burger King takeover, and Heinz's global reach have combined to appeal to investors at a time when M&A activity has generally been exceptionally slow.

Order books for the new Heinz bond - a 7.5-year non-call two issue - were heard Thursday night to be more than $10 billion.

Lee called Buffett's commitment to the buyout "a seal of approval".

Wells Fargo, JP Morgan, Barclays and Citigroup are joint bookrunners on the bond issue.

Wells Fargo and JP Morgan are also joint books on the term loans, guidance on which is now Libor+225bp and Libor+250bp, with a 1 percent Libor floor on each.

Final pricing could change even after lender commitments are submitted.

A number of other banks are sub-underwriting the loans, including Banco do Brasil, Barclays, Citigroup, HSBC, Itau Unibanco, RBC and UBS.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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