The Oracle from Omaha is back. Warren Buffett has snapped up food giant Heinz, best known for its iconic ketchup brand, through his own company Berkshire Hathaway and private equity group 3G Capital.
But the move is a strange one – Buffet has historically been wary of private equity groups, often distrustful of the way they shun long-term plans for short-term profits.
But Buffett has now teamed up with 3G Capital – a South American firm led by billionaire Jorge Paulo Lemann which purchased Burger King in 2010 – to buy Heinz for $US23 billion in one of the biggest acquisitions in the food industry. One of the more recent, large acquisitions was the Kraft purchase of Cadbury for $US21 billion in 2010.
Even more fascinating is the leadership structure. Buffett has told CNBC that Berkshire Hathaway won’t be in charge of the company’s management, saying 3G Capital instead will “be in charge of things”.
“It’s their baby from an operational standpoint,” he said. The deal will be financed through cash and debt financing, subject to shareholder approval.
Shares in Heinz rocketed 20% after the deal was announced, trading above $US72. The business has been on a growth spurt in the past few years, with 30 consecutive quarters of revenue growth.
Heinz chief executive William Johnson has been outspoken regarding the state of the food industry, which has suffered an enormous amount of discounting. After the deal was announced, he said the company would be “more focused, more competitive, more nimble and benefit from much faster decision-making”.
Yet while the deal is strange, as Buffett tends to shun private equity, the Heinz acquisition fits well within his own investment philosophy of purchasing strong, sustainable and recognisable brands led by good managers.
In a statement, he said the company had “strong, sustainable growth standards based on high quality standards…[and] excellent management”.
It doesn’t seem Buffett’s plans are over, either. Berkshire had a cash balance of $US48 billion before this purchase and reports indicate he could be looking for more.
So while this deal may but a bit unusual for the world’s most successful investor, it also makes complete sense. Here are five reasons why:
Heinz is one of the most recognisable brands in the United States – a trait Buffett loves. The company’s iconic ketchup and baked beans products are staples in American households. Such a strong brand proposition is hard to ignore.
Buffett won’t make a deal if the leadership isn’t right. Having strong management in charge of such an iconic brand is a great factor, here, but there’s also another aspect to the decision. 3G Capital already owns and runs Burger King, so the company has good experience in the food sector. Buffett’s decision to team up with private equity was surely made easier by the company’s industry experience.
Buffett loves to diversify. Berkshire Hathaway now owns fast food chain Dairy Queen, underwear group Fruit of the Loom, paint company Benjamin Moore and insurance group Geico. He even bought a railroad business back in 2009. Good investors know not to put all your investments in one basket. Having a company in the food industry expands Berkshire’s portfolio to an area where it previously had little exposure.
Heinz is a strong, large brand, which can be used to snap up other businesses in the food space as well. Buffett said at a press conference the company could be used to find smaller, profitable businesses. Diversifying the portfolio into food allows Berkshire to extend its reach beyond Heinz itself.
Heinz doesn’t just operate in the United States. The business owns a Chinese soy sauce maker, along with a South American condiments manufacturer – the latter acquisition nearly doubled the company’s Latin American sales in a year.
Acquiring Heinz doesn’t just give Buffett a good holding at home, it exposes the company to growth internationally.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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