Investment groups buy Pittsburgh icon Heinz for $28 billion

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About eight weeks ago, Heinz CEO Bill Johnson had dinner with Alex Behring and Jorge Paulo Lemann of 3G Capital.

That meal would lead to the deal that the investment community has been anticipating for years and some Pittsburghers have been dreading.

Before the stock markets opened Thursday, the world-famous ketchup maker announced it had agreed to be acquired for $28 billion in cash and debt by an investment group partnership between Berkshire Hathaway, headed by one of America's great investors, Warren Buffett, and 3G Capital, a New York firm that already owns well-known brands such as Burger King and Budweiser.

It didn't take long for the markets to heat up -- even before they officially opened -- and the conversations among investors, shareholders, Pittsburgh officials and ketchup lovers to go a little crazy. "Buffett better not touch my ketchup," said one post on the Heinz Facebook page. Another worried about the pensions and health benefits of family members.

Heinz has been the subject of takeover rumors for years, as many thought it was a small enough and tempting enough player in the food business to be swallowed by another company. And with money available at low interest rates, some think it might be followed by more mergers in the food industry.

The upside-down flip from a public to private company might even allow Heinz to more easily shed some of its slower-performing businesses, said Alexia Howard, senior analyst at Bernstein Research, in a report to investors Thursday. "The move to private ownership could facilitate more restructuring and the sale of one or more of its businesses," she wrote.

The actual deal announced Thursday appeared to come together quickly, as someone with an up-close view of the process can attest.

"It's been a whirlwind," said Susie Johnson, who was sitting in the back of the room on the 31st floor of One PPG Place while her husband and Mr. Behring explained their plans to the media. Ms. Johnson noted that she and her husband played it very close to the vest during the process. "We didn't tell our children, who are in their 30s."

The negotiations, which Mr. Johnson firmly said Heinz did not initiate, took some back and forth. Bloomberg reported Thursday that an offer made Jan. 14 was for $70 a share, but that was rejected and the bidders came back with more. A Heinz spokesman declined to comment on the report.

In the end, Mr. Johnson said the price was good enough that he felt obligated to take it to the board. "The value opportunity for shareholders was too great to pass up," he said.

The company's board, which brought in outside advisers to assess the offer, met in person to approve the sale Wednesday night.

Mr. Johnson at Thursday's press conference proudly noted that, if the deal wins regulatory and shareholder approval, shareholders will receive $72.50 in cash for each share of common stock they own, with the total transaction valued at $28 billion, including the assumption of Heinz's outstanding debt.

That per-share price represents a 20 percent premium to Heinz's closing share price of $60.48 Wednesday and a 30 percent premium to the one-year average share price.

On Thursday, the shares closed at $72.50, up $12.02 or almost 20 percent.

The transaction will be financed through a combination of cash provided by Berkshire Hathaway and affiliates of 3G Capital, rollover of existing debt, as well as debt financing that has been committed by J.P. Morgan and Wells Fargo.

Employees in Pittsburgh were given some assurances Thursday, if not firm ones.

Mr. Johnson said keeping the company's headquarters in the city is in the contract. "I told them Pittsburgh was non-negotiable," he said.

Heinz has about 1,200 employees in the region, between its world headquarters and its North American headquarters, both Downtown, and its research center in Marshall. The place on the North Side that traffic reporters call the Heinz plant hasn't been owned by the company for years.

When Mr. Behring was asked whether the Heinz organization would be subject to the cost-cutting and push for efficiencies seen at other 3G Capital acquisitions, he didn't reveal much about his company's plans. "I think we've been involved in a variety of deals in the past," he said, offering that some businesses were in better shape than others.

He said it would like take a while to get in and really understand the business. "This is a company that's doing extremely well as it is and has been doing extremely well," he concluded.

Mr. Johnson said, more than once, that Heinz is coming into the deal from a position of strength.

With $11.6 billion in annual revenue and operations on six continents, Heinz and its brands seem to be everywhere, from the UK where Heinz beans on toast are a favorite, to Italy where it sells baby food. Indeed, Mr. Behring cited the fact that the company is known by consumers around the world as one of the attractions in making the deal.

But some in the investment community thought Heinz needed to be bigger to truly compete in an industry with players such as Kraft and General Mills.

In 2006, Heinz fought a proxy battle with activist investor Nelson Peltz, who thought the company could do more with its iconic brands. Mr. Peltz and his group ended up winning two seats on the board, not enough to take control but enough to have an influence. Mr. Johnson has remarked in the past that he talks regularly with Mr. Peltz.

If networking among players in the private investment world didn't do the trick, one of Mr. Johnson's favorite strategies -- expanding globally -- may have helped put Heinz on the 3G Capital radar. During his almost 13-year tenure as CEO, he has pushed hard to get into emerging markets to the point that 21 percent of sales came from emerging markets in the most recent fiscal year, with rapid growth expected.

That helps drive investments in markets with rapidly growing middle-class populations such as Russia and China. In 2011, Heinz made a move into Brazil, where Mr. Behring and Mr. Lemann have done work. The company's Quero brand quickly began producing solid sales results, and Heinz set in place plans to introduce its ketchup there.

Taking the company private, Mr. Johnson and Mr. Behring argued Thursday, would make it more nimble, and Ms. Howard of Bernstein Research agreed with that assessment.

In addition to wondering if Heinz should sell its U.S. frozen food business, which has brands such as Smart Ones and Ore-Ida, she said investors thought it could expand in the baby food category in developing markets. But the dividend payout to shareholders was such a key part of its attractiveness as an investment, that selling the frozen food business would have been "problematic."

In 2002, when Heinz sold off its StarKist tuna operation and canned soup lines to Del Monte Foods, shareholders were not pleased when it also trimmed its dividend.

In Ms. Howard's opinion, getting a competing offer from other food companies at this point seems unlikely.

The deal with Berkshire Hathaway and 3G Capital does not lay out a management structure, so it's unclear if Mr. Johnson, 64, who also is chairman and president of the company, will retain his roles. He said he's not ready to retire but if he does, he should be OK.

He received compensation valued at $16.2 million in Heinz's most recent fiscal year, including a $1.3 million salary and stock and option awards valued at $4.1 million. The company's most recent proxy statement indicates he is entitled to pension benefits of $44.4 million.

Like other companies, Heinz offers protection to top executives in case they lose their job as a result of a takeover, often referred to as golden parachutes. Mr. Johnson would receive severance and other compensation valued at $33.3 million if he were terminated without cause or he left for good reason in the two years following a takeover, according to the proxy statement.

Collectively, Mr. Johnson and the company's next three highest-paid executives are entitled to golden parachute payments valued at $67.5 million.

But how the management's future plays out won't be determined for a few more months as the deal goes through the acquisition process and the new owners decide what they want to do with their new business.

Mr. Johnson held a global town hall meeting Thursday morning with hundreds of employees on site at PPG Place and thousands more participating around the globe. During that, he got emotional, saying at one point, "And, no, I did not cry when I had lunch with Warren (Buffett) on Monday," according to a transcript of the meeting filed with the Securities and Exchange Commission later in the day.

He went on to say: "This is hard. The heart of Heinz has always been you, our people, whether you are a new employee who probably thinks that your CEO is a blithering idiot sitting up here crying like a baby, or you've been around for a long time, let there be no mistake in your understanding. It is the dedication and loyalty of you that got us here."

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Teresa F. Lindeman: or at 412-263-2018. Len Boselovic contributed to this story. First Published February 15, 2013 5:00 AM


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