H.J. Heinz, which is controlled by Warren Buffett's Berkshire Hathaway Inc. and buyout firm 3G Capital, said Wednesday that it agreed to buy the macaroni-and-cheese maker in a cash-and-stock deal.
The companies said the combination will produce $1.5 billion in annual cost savings by the end of 2017 and probably add to earnings per share that year.
“It’s the press-release version of saying they’re going to fire people,” said Meyer Shields, an analyst at Keefe Bruyette and Woods. “When you look at the fact that the deal is not accretive until 2017, that tells me that it’s only accretive after all these efforts to reduce expenses.”
3G, co-founded by Brazilian billionaire Jorge Paulo Lemann, eliminated more than 7,000 positions in 20 months after taking over Heinz with Buffett. The cuts extended from the management ranks to the factory floor, as the ketchup maker announced plans to shut five plants and offered buyouts to staff in its hometown of Pittsburgh.
While Berkshire provides capital for the takeovers, 3G manages operations. That arrangement has helped Buffett distance himself from firings that could tarnish his reputation, Shields said. “Historically, that’s not the Berkshire way,” Shields said of the cuts. “Having 3G as cover has worked so far.”
Buffett has backed 3G’s approach publicly, including in late 2013 when asked in Detroit about job reductions, which included cuts at a facility in nearby Leamington, Ontario.
Moving tomatoes
“The tomatoes are going to go to the plants that have the low production costs, when you get right down to it,” Buffett said. “It’s really a question of having an unprofitable plant and concentrating production in a more profitable plant.” 3G grounded corporate jets and pulled the plug on mini- fridges at Heinz offices. The company had 24,500 full-time employees as of Dec. 28, compared with 31,900 as of April 28, 2013, according to regulatory filings.
The moves helped the company boost profit to $657 million last year even as sales declined 4.6 percent. The ketchup maker paid $720 million in dividends to Berkshire, which owns preferred shares in Heinz. Lemann and his partners have previously combined companies to help slash costs and gain leverage over suppliers. They joined InBev NV with Budweiser-maker Anheuser-Busch Cos. in 2008 to create the world's largest beer manufacturer.
‘Leaner organisation’
Before the deal, executives at Kraft had a plan “to focus on driving, much like 3G has done at times, a much leaner organisation with much better decision-making,” chief executive officer John Cahill said on a conference call with investors Wednesday. “Fortunately, we have this transaction now where we’re bringing in management that can actually have this happen faster and deeper.”
Alex Behring, the chairman of Heinz, will lead the board of the new Kraft Heinz Co. Berkshire and 3G will invest another $10 billion in the combined company and Heinz shareholders will maintain a majority stake, according to the statement.
The new owners should be able to revive Northfield, Illinois-based Kraft, given their track record and the strength of the target company’s products, which include Velveeta cheese and Jell-O, said Richard Cook, a Berkshire investor. “You take a business with brands as good as Kraft and a management team with a history of excellence, then there’s probably additional profitability.” Cook, co-founder of Cook and Bynum Capital Management, said in an interview.
Bloomberg
