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
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.