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H.J. HEINZ M&A CASE

During December 2012, Jorge Paulo Lemann, a co-founder and partner at 3G, proposed to Warren Buffett that 3G and Berkshire Hathaway acquire H. J. Heinz Company. Lemann and Buffett, who had known each other for years, jointly decided that the Heinz turnaround had been successful and that there was significant potential for continued global growth. 3G informed Heinz CEO William Johnson that it and Berkshire Hathaway were interested in jointly acquiring his company. Johnson then presented the investors’ offer of $70.00 per share of outstanding common stock to the Heinz board.

At a meeting on January 15, 2013, the Heinz board appointed a transaction committee and voted to retain Centerview and Bank of America Merrill Lynch as its advisors. The board and advisors discussed the trends that were negatively impacting Heinz, including low international GDP growth. They also discussed options to a sale, including remaining a standalone company or pursuing acquisition by another company in the food and beverage industry. After updating its strategic plan and financial projections, Heinz informed 3G that without better financial terms it would not continue to discuss the possibility of an acquisition. Two days later, 3G and Berkshire Hathaway returned with a revised proposal of $72.50 per share, for a total transaction value of $28 billion (including Heinz’s outstanding debt). A week after the new proposal, Heinz agreed to continue discussing the acquisition.

Following a forty-day “go-shop” period (permitting Heinz some time to look for other investors), on February 13, Heinz, 3G, and Berkshire Hathaway agreed to sign the deal. On that day, investment banking advisors presented to the Heinz board their opinions that the acquirers’ offer was fair from a financial perspective. The transaction committee of the board also provided its approval of the acquisition, allowing execution of a merger agreement and a press release announcing the transaction. But was this, in fact, a fair deal? And what might be the future consequences for shareholders, management, employees, and citizens of Pittsburgh, the location of the company’s headquarters? Last, what was the role of activist investors in bringing Heinz to this deal stage?

QUESTIONS FOR THE CASE:

1. Discuss the positions of various stakeholders, including Heinz shareholders, management, employees, and citizens of Pittsburgh.

2. Discuss the go-shop process, explaining why it may be necessary and listing any risks associated with it.

3. Why were so many investment bankers involved in this transaction, and what were their respective roles?

4. What was the acquisition premium? Was this reasonable? QUESTIONS FOR THE CASE:

6. Why did this transaction propose zero synergies? Discuss and quantify potential synergies that could be realized, including where they come from and the period of time over which they can be realized, and quantify the impact on enterprise valuation.

7. What was the reason for an all-cash transaction, and what are the disadvantages of this form of consideration (as opposed to using common shares as consideration)? What are the principal risks and benefits of this transaction for 3G and Berkshire Hathaway?