Berkshire Buyout a Sweet Deal for Heinz

The packaged-food industry has been ripe for value-enhancing transactions--both marriages and divorces--for quite some time. To that end,  H.J. Heinz announced this morning that it is to be acquired by  Berkshire Hathaway (BRK.A) (BRK.B) and 3G Capital in a $28 billion deal ($72.50 per share), valuing the company just north of 12 times our adjusted fiscal 2014 EBITDA estimate, roughly in line with transaction multiples for other recent takeovers in consumer packaged goods. 

Our initial take is that this is a fabulous deal for Heinz shareholders, representing a nearly 30% premium to our fair value estimate and a 20% premium to Wednesday's closing price. We are putting Heinz under review and intend to raise our fair value estimate to the takeout price, as we don't anticipate any roadblocks to the deal's completion.

We've long regarded Heinz--the most global of the U.S.-based packaged-food firms--as maintaining broad competitive advantages, deriving from its expansive global scale and the brand strength inherent in its refocused product portfolio, resulting in our narrow economic moat rating. 

It appears that Warren Buffett shares our take. The Heinz brand, which is on an array of products from ketchup to baked beans to baby food, is a $4.5 billion global powerhouse, accounting for about 40% of the firm's total revenue, and Heinz's top 15 brands (each of which results in more than $100 million in annual sales) drive about 70% of revenue every year. In addition, Heinz generates a boatload of cash--free cash flow averaged nearly 10% of sales annually over the past five years--and we bet that Berkshire found this to be quite attractive.

Heinz has been challenged in North America, with problems that go beyond the macro headwinds plaguing its peers. For instance, the Ore-Ida brand has faced an onslaught of issues, stemming from aggressive competition from private-label offerings and product innovation that has failed to excite consumers. But we've been encouraged by management's focus on driving further efficiencies and reinvesting in its brands, which we think will ensure its competitive advantages remain intact over the longer term.

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