New Heinz owners to focus on cutting $14B in debt
By Alex Nixon
Published: 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 firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Health-insurance mandate poses potential hitch for volunteer fire companies
- Washington County gas drilling spill cited in lawsuit not reported to state
- PNC plans to do away with tellers
- Pace of enrollments on Healthcare.gov more than double, government says
- Maximize tax deductions with charitable gift
- Poll shows strong opposition to in-flight calls
- Unemployment rate falls as employers add 203,000 jobs nationwide
- American Eagle Outfitters’ quarterly profit down 68 percent
- Cecil-based Rice Energy to go public
- Barra breaks GM glass ceiling
- Czech brewer gets Budweiser trademark