Acquisition may double Heinz debt
Billionaire Warren Buffett's love of ketchup and hash browns is transforming H.J. Heinz Co. into the most-leveraged food maker in America.
The acquisition of Heinz by Buffett's Berkshire Hathaway Inc. and 3G Capital Inc. for $28 billion including debt may double the company's debt to five times earnings before interest, taxes, depreciation and amortization, according to Fitch Ratings, the highest of any comparable food company.
Meanwhile, Heinz reported a third-quarter profit on Thursday of $269.5 million, or 83 cents a share. The Downtown-based food producer's latest earnings are down about 5 percent from the $284.7 million, or 88 cents, reported for the same quarter a year ago.
Heinz's sales grew 2 percent to $2.93 billion, however, with sales in what the company refers to as emerging markets growing by 17.6 percent led by Latin America, Indonesia and China.
Heinz shares closed at $72.19 Thursday, up 5 cents.
While Buffett has used takeovers to build Berkshire into a $249 billion company and burnish his reputation as the world's most successful investor, financing the deal with $14.1 billion in debt threatens to strip Heinz of the investment-grade rating that it's had for four decades.
The trading “underscores the hazards of high-grade bonds in an active M&A environment,” said Martin Fridson, chief executive officer of research firm FridsonVision LLC. Investors should be aware of the “inherent danger now that leveraged buyouts as well as strategic acquisitions are once again prominent in the financial landscape,” he said.
Michael Mullen, a spokesman for Pittsburgh-based Heinz, could not be reached for comment.
Instead of boosting its credit profile to match Omaha-based Berkshire's AA+ and Aa2 ratings, Heinz was cut to junk in two days in the eyes of credit investors, Moody's data show.
Heinz's leverage may increase to five times or more after the takeover is completed from 2.5 times on Oct. 28, according to a Feb. 15 Fitch report in which the rating firm cut Heinz's credit grade to BB+. That would make the ketchup-maker the most highly leveraged food manufacturer with a market value greater than $5 billion.
, data compiled by Bloomberg show.
Heinz, which said in a Nov. 20 regulatory filing that it had about $5.04 billion of debt at the end of October, obtained $14.1 billion in financing from JPMorgan Chase & Co. and Wells Fargo & Co. to support the deal, according to a Feb. 15 filing.
Berkshire and billionaire Jorge Paulo Lemann's 3G will each pay about $4.1 billion for an equity stake. Berkshire is contributing $8 billion for preferred shares, for an annual dividend of 9 percent, Buffett's firm said in a filing.
The credit-default swap contracts tied to the company's debt fluctuated by more than 400 percent, in the two trading days after it was announced, CMA data show. Swaps are insurance to protect investors in Heinz's debt.
“It took the market time to digest just how leveraged, and how subordinated, senior unsecured bondholders will be as a result of approximately $10.5 billion of senior secured bank debt that will be layered ahead of bonds that don't benefit from a change of control,” said John Kneebone, a credit analyst at Paris-based BNP Paribas SA. “Many see the potential for leverage to go higher than anticipated levels” of about 6.1 times, he said.
Shares of the maker of condiments and Ore-Ida potato snacks, led by CEO Bill Johnson since 1998, had gained 17 percent in the past 12 months as it boosted sales in developing economies. The company traces its roots back to 1869, when Henry John Heinz and neighbor L. Clarence Noble began selling grated horseradish, according to Heinz's website. The company introduced its famous Tomato Ketchup in 1876.
“While details about the company's financing plans or additional debt needs have not been disclosed, we believe the transaction would weaken Heinz's credit protection measures well below current levels,” S&P analysts Bea Chiem and Jeffrey Burian wrote in a Feb. 14 note.
Bloomberg News and Trib Total Media staff writer Kim Leonard contributed to this report.