Heinz buyer 3G Capital has history of shake-ups
Warren Buffett may be the well-known investor behind the $28 billion deal to buy Pittsburgh ketchup maker H.J. Heinz Co., but a Brazilian investment firm known for aggressive management will call the shots.
Jorge Paulo Lemann and his firm 3G Capital are best known for two major deals involving American companies in recent years: the $3.3 billion acquisition of fast-food chain Burger King in 2010 and the $52 billion InBev takeover of brewer Anheuser-Busch in 2008. In both cases, the acquired companies underwent big changes, including management shake-ups, cost cutting and new products.
Will that be Heinz's fate once the deal closes later this year?
Analyst Jack Russo of Edward Jones in St. Louis does not think so.
“I'm not sure 3G really is going to change things up a whole lot,” Russo said. “Heinz appeared to be run pretty effectively. ... The company was doing a lot of things right.”
That was the message from 3G Capital Managing Partner Alex Behring, who said he had been involved with acquisitions of a variety of companies, some of which required cost cutting and some that did not.
With Heinz, “this is certainly a company that is doing extremely well,” Behring said on Thursday during a news conference in Pittsburgh announcing the deal.
Unlike Lemann, billionaire investor Buffett is known for his hands-off style with the companies his Berkshire Hathaway acquires. On Thursday, Buffett, who favors stable companies with good cash flow and growth potential, said Heinz has “strong, sustainable growth potential based on high quality standards, continuous innovation, excellent management and great-tasting products.”
Lemann, also a billionaire, had a major stake in Belgium brewer InBev when it bought America's largest brewer Anheuser-Busch five years ago. He and his 3G Capital partners are directors of the merged company, which cut longtime perks for Anheuser-Busch employees and laid off about 1,400 workers.
Two years later, 3G acquired Burger King and set about transforming the smaller rival to McDonald's.
Russo said Burger King needed a lot of help, such as new products, restaurant renovations and better relationships between the company and its franchisees.
“It's really night and day compared to Heinz,” he said.
3G Capital also cut costs at Burger King, which it took public last year, although 3G Capital still owns a 70 percent stake.
Those efforts are paying off for the world's third-largest fast-food chain, which posted a higher-than-expected quarterly profit, helped by lower expenses and new food offerings. Total fourth-quarter operating costs and expenses plunged more than 40 percent to $292.6 million as the fast-food company spent less on everything from food and packaging to payroll and rents. And net income nearly doubled to $48.6 million.
Heinz's performance has not been shoddy either. The company reported a 22 percent jump in second-quarter net income in November, its most recent results, to $289.4 million. It also confirmed earlier predictions of 5 percent to 8 percent growth in earnings per share for the full year, and its stock has been rising.
Behring said 3G Capital was attracted to Heinz for three reasons. The Heinz brand is well-established and known around the world, he said. The company's products are very strong, holding No. 1 or 2 spots in their respective food categories. And he said Heinz has benefited from strong leadership, especially from CEO William Johnson.
Investment bank Goldman Sachs, which declined to speculate on 3G Capital's plans for Heinz, issued a message to investors after the deal was announced on Thursday, saying it continues to have “a relatively bearish view on Heinz's fundamental business.”
Under-investment by Heinz in North America “will result in continued profit erosion and an anchor as the company focuses on expansion into higher-growth emerging markets,” Goldman Sachs said.
Because the deal has not been completed, Behring could not predict what he might do with Heinz in the future. But the talk from Behring and Johnson on Thursday focused on “long-term value” and using Heinz “as a platform to get bigger” around the world, probably through acquisitions.
Russo said investors took notice of the “platform to get bigger” comment as a signal that Heinz will look at acquiring other food companies. That led to gains by several companies, including General Mills and Campbell's Soup.
Russo predicted it could be years before Heinz announces an acquisition.
“Clearly they're going to have their hands full for a while,” he said.
Given the size of the transaction — $23 billion plus $5 billion in debt — “they'll want to get comfortable with this before they do anything else,” Russo said.
Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or email@example.com. Bloomberg News and Reuters contributed to this report.