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Another brilliant deal by Buffett to acquire Heinz especially when you hear about some of the details of the deal. There is a reason why Berkshire is up 1% even though the acquisition price is much higher than the Heinz's recent all time high.

The details that are coming out is that the majority of Buffett's stake is coming from preferred shares paying a 9% dividend. For all intensive purposes with a cash cow like Heinz with easily manageable debt this preferred stake might as well just be a bond paying a 9% yield since Heinz will never have any problems producing the cash flow to pay that dividend.

So what he has essentially done is provided a several billion dollar loan to the uber safe Heinz at 9% because his partners on the deal 3G believe they can operationally grow the company(a much more dicey proposition given it's already massive market share in the business it's already in). Furthermore, I sincerely doubt with his stake and terms of the deal that 3G will be allowed to leverage of the company any more than it is risking the revenue that supports Buffett's high dividend income stream.

And that means that Buffett has successfully engineered a deal where he gets to strip out a large portion of Heinz's cash flow and 3G is left trying to operationally grow the company with reduced cash flow after the dividend payments and likely without any ability to leverage the business any more than it is.

So in case anybody could be curious as to why in an M&A deal Heinz would be way up and Berkshire also up, it's because if 3G was a publicly traded entity it would be down as the details broke.

Got to love how he puts these deals together. Absolutely genius!

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Most Recent Posts
1) I cannot eat any other ketchup than Heinz, and I can tell the difference (I normally buy generic for everything else)... (more)

jkimcpa (Feb. 18, 2013 @ 9:36p) |

Why do not like him? His politics?

Feel free to go full rant because I'm genuinely interested.

dshibb (Feb. 18, 2013 @ 9:42p) |

Yes, please elaborate. What is there to despise about Buffett??? Can't wait for this one.

SaulHudson (Feb. 19, 2013 @ 5:25a) |


dshibb said:   For all intensive purposes ...

Would you be willing to elaborate on the relaxed purposes too?

All I can say is they better not mess with the ketchup recipe, one of My can't live without condiments (don't pull a makers mark)

07pilot4me said:   All I can say is they better not mess with the ketchup recipe, one of My can't live without condiments (don't pull a makers mark)

I think you're safe there.


On a different note: A big reason why Buffett likes companies with solid brands, huge market share, and inexpensive pricing is that in the event inflation starts to rise they can very easily pass along higher input costs on to customers with almost zero change in customer buying behavior.

I mean in Ketchup goes up a few percent and costs you a few extra cents are you going to change your mind on buying it? No!

Companies like these are his inflation play by his own admission. So he gets a deal where he mostly has a bond with a 9% a yield and the other component is a blue chip equity that in a theoretical way acts like a TIPS in his mind, and this comes from a company that is for sure going to be around and earning in another 50 years.

I always buy store brand ketchup. It all tastes the same to me

Banana Ketchup for the win! UFC spicy brand. Seriously better than anything else.

07pilot4me said:   All I can say is they better not mess with the ketchup recipe, one of My can't live without condiments (don't pull a makers mark)

^^^^ Has not tried Sir Kensington's Gourmet Scooping Ketchup

Squeezer99 said:   I always buy store brand ketchup. It all tastes the same to me
Wow - that's great for you since you can enjoy the cheap stuff

Store brands rarely taste the same to me. I gladly pay for higher quality foodstuffs and I can taste the difference . Good thing I dont like wine or coffee ,


dshibb said:   a cash cow like Heinz with easily manageable debt this preferred stake might as well just be a bond paying a 9% yield since Heinz will never have any problems producing the cash flow to pay that dividend.

I don't think you're taking into account the fact that this is an LBO. The deal will partially be funded with bonds and loans senior to this Buffet preferred, the interest on which will eat into the company's hefty cash generation. Heinz's credit rating will definitely be slashed. They'll still have cash to pay the preferred, but with much less cushion than you might be assuming.

PitPirate said:   dshibb said:   a cash cow like Heinz with easily manageable debt this preferred stake might as well just be a bond paying a 9% yield since Heinz will never have any problems producing the cash flow to pay that dividend.

I don't think you're taking into account the fact that this is an LBO. The deal will partially be funded with bonds and loans senior to this Buffet preferred, the interest on which will eat into the company's hefty cash generation. Heinz's credit rating will definitely be slashed. They'll still have cash to pay the preferred, but with much less cushion than you might be assuming.


I'm well aware that this is LBO and I'll admit that as I thought about it the level of the new debt is going to lower the cushion quite a lot, but let's be honest here Heinz's cash flows are about as stable as it gets.

Check my math here:
-Company is sitting on $5 billion in debt almost exclusively long term debt.
-To service that debt it pays about let's say around $300 a million a year against EBITDA of about $2 billion and growing(which should remain a very safe $2 billion).
-The LBO adds on about $10 billion in new debt.
-So we're looking at around $15 billion in total debt likely financed at around $900 million a year, right?
-So that leaves $1.1 billion in excess to pay out 9% on $8 billion of preferred stock which $720 million and you can't forget taxes right?(which will be down considerably in light of more 'debt shield' interest write off)
-Let's also not forget that $1 billion in cash which could explode higher in the coming months if this deal means that common shareholders aren't going to get the remaining dividend checks. So what when ink's dry $1.5 billion in cash to smooth things out?
-We can also probably assume that they're going to lean up Heinz a bit, and likely already have a plan in place to cut out a sizable chunk of the company. A good estimate of this is likely to be at least a couple hundred million a year in expenses, right?

So yeah I would tend to believe that a company with as stable of cash flows as Heinz is pretty reliable to meet those dividend payments.

Stubtify said:   Banana Ketchup for the win! UFC spicy brand. Seriously better than anything else.

bananas might be an option if Heinz is ever hurting for margins (ala horse meat in burgers). Heinz ketchup pretty popular

You're forgetting capex... just pulled up last fiscal year's 10-K and it was $419 million (though I think total debt will be less than what you're assuming, so that interest payment could be a partial offset). I wasn't saying that Buffet's investment was stupid or that the company won't be able to pay the dividend. I agree that under most operating conditions they will. Just pointing out that things will be a LOT tighter than in the past, which your post seemed to gloss over, but you seem to know what's going on.

PitPirate said:   You're forgetting capex... just pulled up last fiscal year's 10-K and it was $419 million (though I think total debt will be less than what you're assuming, so that interest payment could be a partial offset). I wasn't saying that Buffet's investment was stupid or that the company won't be able to pay the dividend. I agree that under most operating conditions they will. Just pointing out that things will be a LOT tighter than in the past, which your post seemed to gloss over, but you seem to know what's going on.

Question is how much of that capex is reoccurring capex and how much of it is designed to expand, open up new product lines, etc.

dshibb said:   PitPirate said:   You're forgetting capex... just pulled up last fiscal year's 10-K and it was $419 million (though I think total debt will be less than what you're assuming, so that interest payment could be a partial offset). I wasn't saying that Buffet's investment was stupid or that the company won't be able to pay the dividend. I agree that under most operating conditions they will. Just pointing out that things will be a LOT tighter than in the past, which your post seemed to gloss over, but you seem to know what's going on.

Question is how much of that capex is reoccurring capex and how much of it is designed to expand, open up new product lines, etc.


Yeah, it seemed to be running on the high side vs. the prior couple years - I'm sure they could manage with 50-75% of that amount. Still, it's important to include capex.

How much of the value creation here is just leveraging up to transfer the tax liability on profits (previously going to the Feds) to the preferred shareholders, etc?

Man... buffet did it again, he kicked me out of a great company, I have had heinz stock for a while now, the small investor loses again...sigh.....

Stubtify said:   Banana Ketchup for the win! UFC spicy brand. Seriously better than anything else.

My Asian in-laws handed me this when my wife and I dined at their place one evening, and I had asked "Is there any Ketchup?"...

Bananas in Ketchup makes as much sense as Pickles in Pancakes. There's a -reason- it's not popular.

As Daddy would say, "What the hell is a matter with you?!"...

intex45 said:   Man... buffet did it again, he kicked me out of a great company, I have had heinz stock for a while now, the small investor loses again...sigh.....

Stop being poor and buy some BRKA.

Or buy BRK.B and get rich..

kriskos4 said:   intex45 said:   Man... buffet did it again, he kicked me out of a great company, I have had heinz stock for a while now, the small investor loses again...sigh.....

Stop being poor and buy some BRKA.

SUCKISSTAPLES said:   Squeezer99 said:   I always buy store brand ketchup. It all tastes the same to me
Wow - that's great for you since you can enjoy the cheap stuff

Store brands rarely taste the same to me. I gladly pay for higher quality foodstuffs and I can taste the difference . Good thing I dont like wine or coffee ,


I think Wegmans's Organic Ketchup tastes better than Heinz. Seriously.

xerty said:   How much of the value creation here is just leveraging up to transfer the tax liability on profits (previously going to the Feds) to the preferred shareholders, etc?

Thought the same thing!

Got to love that debt shield right!

intex45 said:   Man... buffet did it again, he kicked me out of a great company, I have had heinz stock for a while now, the small investor loses again...sigh.....

Did it AGAIN?

So was it the second time you entered into a position before Buffett?

I would feel pretty good if I were you!

intex45 said:   Man... buffet did it again, he kicked me out of a great company, I have had heinz stock for a while now, the small investor loses again...sigh.....

You're getting a great price not worth complaining about it.

SantaLink said:   intex45 said:   Man... buffet did it again, he kicked me out of a great company, I have had heinz stock for a while now, the small investor loses again...sigh.....

Did it AGAIN?

So was it the second time you entered into a position before Buffett?

I would feel pretty good if I were you!


Agreed!

SUCKISSTAPLES said:   Squeezer99 said:   I always buy store brand ketchup. It all tastes the same to me
Wow - that's great for you since you can enjoy the cheap stuff

Store brands rarely taste the same to me. I gladly pay for higher quality foodstuffs and I can taste the difference . Good thing I dont like wine or coffee ,


Coffee is the one thing where I will not buy the store brand. It is nasty, even Aldi's coffee is nasty and their store brands (which is usually the only brand) are normally pretty good. My taste buds are not that refined when it comes to ketchup, so I make do with what the wife buys.

The world's easiest job has to be the Heinz Ketchup salesman.

So the company has $2BB in revenue, $5BB in debt, and adding $10BB additional debt isn't going to significantly impact cash flows? DShibb, your situation had them paying nearly half of their gross revenue towards debt service. I don't think that's sustainable.

have any of you guys read "the snowball" about buffet? I'm finishing it up now and it is a very interesting read, learning that a lot of my assumptions about the guy were off.

http://www.amazon.com/The-Snowball-Warren-Buffett-Business/dp/05...

JTausTX said:   So the company has $2BB in revenue, $5BB in debt, and adding $10BB additional debt isn't going to significantly impact cash flows? DShibb, your situation had them paying nearly half of their gross revenue towards debt service. I don't think that's sustainable.

For a company as stable as Heinz it should be fine especially when you consider some expenese cutting, a sizable cash cushion, reduced taxes due to debt shield, etc.

SUCKISSTAPLES said:   Squeezer99 said:   I always buy store brand ketchup. It all tastes the same to me
Wow - that's great for you since you can enjoy the cheap stuff

Store brands rarely taste the same to me. I gladly pay for higher quality foodstuffs and I can taste the difference . Good thing I dont like wine or coffee ,


Wow SIS you're usually so sharp on these things. I can tell you from personal experience in the CPG industry, that the VAST majority of store brand food is made by the same name brand company. These big box stores effectively buy in bulk, negotiate their own sticker on it and the name brand company profits without losing brand value. Example: in the southeast WalMart Milk is actually Mayfield Milk... Yep, the milk that costs $4/gallon can be had for half that price by buying store brand.

chripuck said:   SUCKISSTAPLES said:   Squeezer99 said:   I always buy store brand ketchup. It all tastes the same to me
Wow - that's great for you since you can enjoy the cheap stuff

Store brands rarely taste the same to me. I gladly pay for higher quality foodstuffs and I can taste the difference . Good thing I dont like wine or coffee ,


Wow SIS you're usually so sharp on these things. I can tell you from personal experience in the CPG industry, that the VAST majority of store brand food is made by the same name brand company. These big box stores effectively buy in bulk, negotiate their own sticker on it and the name brand company profits without losing brand value. Example: in the southeast WalMart Milk is actually Mayfield Milk... Yep, the milk that costs $4/gallon can be had for half that price by buying store brand.


Interesting, you in the few instances where I was aware of companies relabeling at a cheaper price they also tend to assign the lower quality elements within their own company to the off brand product. In cigars left over bushel's go to a completely different cheaper in house cigar brand. Top wine producers have at least one secondary brand where they put their less perfect grapes into. Many very top in clothing operations have secondary brand names that get substantially less attention to detail in the name of creating a lower cost higher volume product and brand.

In every single case I've seen it's quite clear that the main brand is actually superior(due to more and better resources put in), but that secondary brand is usually the best value you can get because it's relatively close in quality for a substantial price discount.

So I guess my main question is: Are these secondary grocery store brands the exact same? Or are they more like the above and represent the lower end of their the companies own quality ingredients?

wpgabriel said:   dshibb said:   For all intensive purposes ...

Would you be willing to elaborate on the relaxed purposes too?


My most memorable malapropism was a conversation I had with a female college prof. who was apologizing for not getting back to me sooner because her "schedule had been really erotic lately." I just kept a straight face and nodded in agreement. And before anyone asks, no, I don't have pics.

dshibb said:   xerty said:   How much of the value creation here is just leveraging up to transfer the tax liability on profits (previously going to the Feds) to the preferred shareholders, etc?

Thought the same thing!

Got to love that debt shield right!


I'm not incredibly familiar with the deal, but preferred dividend payments are not tax deductible, so it would have no effect on their tax liability. The additional debt interest would reduce their profits and therefore the tax, but that's silly to suggest this is a net benefit by itself because the company is paying out $1 to get a 35 cent tax writeoff. A 9% preferred dividend is somewhat equivalent to a 13.85% loan, because that's what the net interest after taxes would be.

ScrawneyWallet said:   wpgabriel said:   dshibb said:   For all intensive purposes ...

Would you be willing to elaborate on the relaxed purposes too?


My most memorable malapropism was a conversation I had with a female college prof. who was apologizing for not getting back to me sooner because her "schedule had been really erotic lately." I just kept a straight face and nodded in agreement. And before anyone asks, no, I don't have pics.


You know I've been saying it that way since I was very, very young(probably around 12ish) and never thought anything of it.

"-Let's also not forget that $1 billion in cash which could explode higher in the coming months if this deal means that common shareholders aren't going to get the remaining dividend checks. So what when ink's dry $1.5 billion in cash to smooth things out?"

Aren't you getting to 1.1bn cash by taking 2bn ebitda less 0.9bn interest? Dividends aren't usually deducted in the calculation for EBITDA, so stopping dividends won't increase EBITDA and won't increase your 1.1bn cash estimate. Also, I agree with someone else that your estimate for debt sounds a little high. 15bn of debt plus 8bn preferred is a ton of leverage on 2bn EBITDA (although potentially still manageable).

Pretty interesting transaction given all the stuff Buffett says about private equity and LBOs. Definitely not going to second guess him. WEB's an investing god.

awstick said:   dshibb said:   xerty said:   How much of the value creation here is just leveraging up to transfer the tax liability on profits (previously going to the Feds) to the preferred shareholders, etc?

Thought the same thing!

Got to love that debt shield right!


I'm not incredibly familiar with the deal, but preferred dividend payments are not tax deductible, so it would have no effect on their tax liability. The additional debt interest would reduce their profits and therefore the tax, but that's silly to suggest this is a net benefit by itself because the company is paying out $1 to get a 35 cent tax writeoff. A 9% preferred dividend is somewhat equivalent to a 13.85% loan, because that's what the net interest after taxes would be.


The LBO debt leverages their equity position as well. So yes it can be quite easily argued that it's a net benefit to the companies shareholders. They leverage their equity and lower their tax bill. I would say that this is a notion that doesn't always hold up IMO, but often can(and I would say that it does in this case).


Good point about the 9% dividend = 13.85% loan, but also keep in mind that when you own a company debt is tax deductible to the company and taxable to you. Dividends aren't taxable to the company are subject to dividend tax to you. If you in theory combine your finances with that of the company(which one can make an argument to do) than it becomes mostly a wash.

BrodyInsurance said:   The world's easiest job has to be the Heinz Ketchup salesman.

have you seen that clip with Jerry Seinfeld and the guy who created Mystery Science Theater 3000?

They're talking about inventing the inverted ketchup bottles we use these days.
They play out what it must have been like in the sales meeting when they first discover the fart sound that those bottles make.

Quite hilarious.

Devo666 said:   "-Let's also not forget that $1 billion in cash which could explode higher in the coming months if this deal means that common shareholders aren't going to get the remaining dividend checks. So what when ink's dry $1.5 billion in cash to smooth things out?"

Aren't you getting to 1.1bn cash by taking 2bn ebitda less 0.9bn interest? Dividends aren't usually deducted in the calculation for EBITDA, so stopping dividends won't increase EBITDA and won't increase your 1.1bn cash estimate. Also, I agree with someone else that your estimate for debt sounds a little high. 15bn of debt plus 8bn preferred is a ton of leverage on 2bn EBITDA (although potentially still manageable).

Pretty interesting transaction given all the stuff Buffett says about private equity and LBOs. Definitely not going to second guess him. WEB's an investing god.


By cash I mean cash on balance sheet not cash flow. Heinz has $1 billion in cash right now. It's not inconceivable that it's $1.5 or even $2 billion by the time that Buffett and 3G actually take control if they can avoid the next couple of dividend payments with the high buyout offer.

Balance sheet cash increase can't come from EBITDA. It comes from net cash flow increase. So in this particular sense I wasn't referring to EBITDA, but higher cash flow from potentially avoiding 2 quarters of dividend payments before the company officially gets acquired.

What is odd is that some news outlets are labeling it a $28 billion deal after factoring in the debt and others are just referring to a $23 billion dollar deal. If we believer the former than it's about $10 billion in new debt(assuming all of it ends up on Heinz's balance sheet and not 3G's), if we are to assume 3G matching Buffett's cash than it's $8 billion in new debt, and if we go off of the $23 billion dollar number than it's slightly more than $5 billion in new debt.

Skipping 28 Messages...
dshibb said:   jkimcpa said:   1) I cannot eat any other ketchup than Heinz, and I can tell the difference (I normally buy generic for everything else). And I can tell when a fast food place uses it (BK, MCD).
2) Nothing to admire Buffett here for. He's pulling a 1%er deal. He's being a p*ssy as usual sticking to pfd.
3) I still despise him as a human and an investor.


Why do not like him? His politics?

Feel free to go full rant because I'm genuinely interested.


Yes, please elaborate. What is there to despise about Buffett??? Can't wait for this one.



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