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Buffett Buys Heinz at All-Time High Prices and Valuations

February 14, 2013 | About:

As we were awaiting Warren Buffett’s new buys and sells for the fourth quarter, Buffett made big news that Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) teamed up with Brazil’s 3G Capital and are buying out HJ Heinz (HNZ) at $23 billion or $72.5 a share. This is a 20% premium from Heinz’s close price yesterday.

We are happy to see that Buffett is finding more “elephant” with his elephant gun. As value investors and Berkshire shareholders, we are naturally concerned about the price of the deal. While Buffett is known for not overpaying, he did display more tolerance lately to prices. All of his recent deals including Burlington Northern, Lubrizol, and Heinz, are done at historical high prices of the companies’ stocks.

Even without the 20% jump today, Heinz stock was traded at all-time high:


HNZ data by GuruFocus.com

While it is ok buy stocks at all-time high, as long as the valuation is reasonable. However, at the deal price of $72.5 a share, Heinz is traded at the highest P/E ratio. The only time that stock was traded at similar P/E was during the bubble years of 2007.


HNZ data by GuruFocus.com

The same can be said to P/S ratio:


HNZ data by GuruFocus.com

Considering Heinz’ revenue and earnings are growing only at low single digits, it is hard to justify to a P/E ratio of above 20.


HNZ data by GuruFocus.com

As the world’s greatest investor, Buffett definitely knows all of these. This is what he said on the price of the deal during the interview with Fox Business: “They (3G Capital) did most of the work in deciding what to pay and I went along with it. I was reluctant but I signed up.”

We all know that when you overpay for something, your return will likely to be lower.

How do you think about the deal?

By the way, we have just updated Berkshire’s new portfolio as of 12/31/2012. Buffett did buy some new stocks. Check it out.

Rating: 5.0/5 (1 vote)


Fan3 - 4 years ago    Report SPAM
Buffett's time frame for his current day investments are usually very long and we know that on a long enough time frame, the initial price you pay is of lesser significance to your final rate of return should the investee continue to compound its capital at a high rate for the long-run.
Ungoat - 4 years ago    Report SPAM
The media treats this deal like "Buffett buys Heinz!" but it looks quite different to me.

It looks like a leveraged buy-out by 3G where they will run the company. Berkshire supplies $12 billion in funding in exchange for $8 billion in preferred shares (paying 9%) and a 50% equity stake.

3G organizes the deal and supplies $4 billion for a 50% stake.

The rest of the $23 billion will be paid for in debt financing, I assume in typical private equity fashion by borrowing vs the assets of the acquired company and loading it up with debt.

Notice that with the new corporate structure, a minority of the value of the company is in the equity -- only $8 billion (with Berkshire supplying half of that). Based on this, I don't think we can view it as a standard acquisition. It more closely resembles Berkshire's Mars-Wrigley deal, where Buffett put up funding in exchange for preferred shares and other considerations. What he is really after is the guaranteed interest, and the equity stake is just a bonus.

Buffett has said the purpose is not to gut or flip Heinz, but it does look like Heinz now exists in order to pay interest to its debt holders, since basically all of its cash flow will be going to pay this interest ($720 million per year to Berkshire for the preferred + whatever interest is due on the $5 billion of pre-existing debt + interest on the other $7 billion that is presumably borrowed to equal the $23 billion purchase price).
Charteroak_2000 premium member - 4 years ago

With the impending increase in inflation over the years, you want a high return on capital business and preferably a simple repeatable strong brands business. And being able to lock up record low interest rates for this LBO is attractive. It beat's having the money tied up in record low T-Bill rates, or bonds that will lose value once inflation and interest rates start climbing back up...

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