Billionaires had eagle eyes set on Heinz

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Posted: Sunday, February 17, 2013 12:00 am

Just days ago, the fate of a 144-year-old American icon was being hashed out in a Pittsburgh conference room as executives spoke by phone to representatives of two global billionaires who went by the code names “Owl” and “Goose.”

Owl was Warren Buffett, chief executive of Omaha-based Berkshire Hathaway and one of the most admired investors in the world. Goose was Jorge Paulo Lemann, who became one of Brazil's wealthiest financiers with 3G Capital. What emerged from the talks was a $23 billion takeover by the two companies of H.J. Heinz, the maker of Heinz ketchup.

Buffett, 82, said he has studied Heinz as a potential takeover target for years, keeping a file on the company as far back as 1980. For years he heard tales of the ketchup-maker from one of its former chief executives, Anthony O'Reilly, at the house of former Washington Post Publisher Katharine Graham.

Still, he didn't breathe a word of his interest to outsiders and never visited Heinz at its longtime corporate headquarters in Pittsburgh.

He did not make the first move. The roots of Thursday's deal lie with 3G, whose principal backer is Lemann, a former Brazilian tennis champion who has since become one of that country's wealthiest men through years of shrewd deal-making.

The two men have been friends for decades, having served on the board of Gillette, and both are big investors in the brewer Anheuser-Busch InBev. At a corporate retreat for the brewer's executives in early December, Lemann approached Buffett with the idea of taking Heinz private and quickly got his support.

Lemann took Heinz's longtime chief executive, William Johnson, out to lunch at the Port Royal Club in Naples, Fla., later that month. At the time, Johnson thought the meeting was about forming a deeper partnership with Burger King, which 3G controls, and no deal was discussed.

It wasn't until last month that Lemann formally approached Johnson with a proposal to buy Heinz, and work began in earnest two weeks ago.

To keep matters confidential, 3G and its advisers refrained from flying to Pittsburgh, instead holding negotiations through phone calls and video chats.

Maintaining Heinz's ties to Pittsburgh was important to Johnson, and the buyers assured him that the company would remain headquartered there.

As part of the code for the deal talks, Heinz executives referred to their company as “Penguin,” a nod to the hockey team in Pittsburgh. But advisers to Buffett and Lemann, having a hard time remembering the nickname, stuck with the bird theme and called the company “Hawk” instead.

The negotiations moved quickly, with Buffett poring over Heinz's financial statements. He and Lemann initially offered to pay about $70 a share last month, according to people with direct knowledge of the process. After some back and forth with Johnson and his advisers, the suitors eventually raised their offer to $72.50.

As the final terms of the deal began to fall into place last week, Buffett invited Johnson and 3G's chief executive, Alexandre Behring, to lunch for the first time. Over burgers at the Hilton in downtown Omaha, Buffett noted that Heinz was started in 1869, the same year that his great-grandfather Sidney founded a grocery store.

Unable to resist tweaking his guest, Buffett recalled that while Heinz ran into financial trouble briefly in the late 1800s, his family's business had fared better.

“So for a little bit of time, we were ahead,” he said Thursday.

The talks concluded in the wee hours of Thursday morning. Exhausted, 3G executives and their advisers celebrated the imminent closing of their deal in suitable fashion: over Whoppers and fries from Burger King, surrounded by piles of Heinz ketchup packets.

Berkshire is splitting ownership of Heinz 50-50 with 3G, with each company putting in about $4 billion in cash. Buffett will pay an additional $8 billion to receive preferred shares, which will pay him an annual dividend of about 9 percent.

The rest of the deal will be financed with debt arranged by banks. The transaction is valued at about $28 billion including assumption of debt.

Buffett and Lemann insist they intend to hold Heinz for the long term. Buffett said he regarded the food company as a trophy asset and would love to buy more control over time.

“We may increase our ownership if any members of the 3G Group ultimately want to sell out later,” he said.

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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