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New Heinz owners to focus on cutting $14B in debt

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Saturday, April 27, 2013, 12:01 a.m.
 

The $28 billion acquisition of H.J. Heinz Co. is expected to lead to further international growth of the iconic Pittsburgh food company in the long term.

But in the short term, a near tripling of the condiment-maker's debt by the buyers, Warren Buffett's Berkshire Hathaway and Brazilian investment firm 3G Capital, could result in aggressive cost-cutting, analysts said.

“We believe that 3G Capital's strategy to use Heinz as a platform for international growth is consistent with the company's attractive growth opportunities, especially in emerging markets,” said Brian Weddington, a Moody's analyst.

“However, we expect that in the near term, the focus will be applying its expertise in extracting major cost efficiencies to try to quickly improve Heinz's operating margins and generate stronger cash flow” to pay down about $14 billion in debt and cover $720 million a year in preferred dividends to Berkshire, Weddington said. Moody's has said it expects to downgrade Heinz's credit rating once the deal closes.

Heinz shareholders, who will receive $72.50 a share in the deal to take the company private, are scheduled to vote Tuesday morning in New York. The deal could close as early as July 1.

3G Capital, known for shaking up management and wringing savings out of the companies it buys, will have primary oversight of Heinz. And while the firm has agreed to maintain Heinz's headquarters and operations in Pittsburgh, there's no guarantee that jobs won't be lost.

3G officials declined to comment.

Heinz spokesman Michael Mullen declined to discuss the company's debt but said in a written statement: “We all look forward to partnering with 3G Capital and Berkshire Hathaway to further strengthen the company. For now it is business as usual at Heinz during this transition as the company prepares for the next exciting chapter in its history.”

Already, 3G has announced a significant change. Longtime Heinz CEO William Johnson is out — though his $212 million golden parachute should soften the blow.

Taking Johnson's place once the deal closes is Bernardo Hees, a 3G partner and CEO of fast-food chain Burger King, which 3G acquired and took private in 2010.

Hees, a 43-year-old Brazilian, was CEO of Latin America's largest railroad and logistics company, Brazil-based America Latina Logistica SA, before joining Burger King.

“My view is there probably is opportunity to improve profit margins” at Heinz, S&P Capital IQ analyst Tom Graves said. “My sense is that Mr. Hees brings with him some experience in cost reduction and I expect he'll find ways to implement that at Heinz.”

At Miami-based Burger King, Hees is credited with turning around the company by slashing costs, revamping the chain's menu and starting a marketing campaign intended to help it pose a greater threat to rival McDonald's.

Hees was not available to comment, Burger King officials said.

Graves cited Hees' experience in the food-service industry and logistics as qualities that should benefit Heinz. He doesn't expect drastic, across-the-board cuts, but expects Hees to focus on squeezing savings out of the supply chains and through more targeted cuts.

While the 144-year-old ketchup and pickle maker is financially stronger than Burger King was when Hees took over, it could be difficult for 3G and Hees to focus on growth until they deal with debt, analysts said.

“There will be more cash applied to debt service than before,” noted analyst Bea Cheim with S&P Rating Services. That means there is “less cash for investing in the business or for acquisitions.”

S&P expects to downgrade Heinz's credit to junk once the deal closes. The company currently has about $5 billion in debt. Loans taken out by Berkshire and 3G to finance their acquisition will increase Heinz's debt to abuot $14 billion, Cheim said.

And while going private means Heinz won't have to shell out $660 million a year in dividends to its shareholders, Berkshire will be collecting a 9 percent annual dividend on $8 billion in preferred shares in the company, or $720 million a year.

“We think it's manageable,” Cheim said of the debt. “But in the past they've grown with tuck-in acquisitions abroad. ... They can't focus too much with growing the business through acquisitions in the near term.”

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or anixon@tribweb.com.

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