Heinz $28 Bn Acquisition Price Implies Faster Global Growth And Thicker Margins Ahead

H. J. Heinz & Co. (NYSE:HNZ)shot up 20% in Thursday’s trade following the announcement of a buyout deal with Berkshire Hathaway and 3G Capital. The two financiers have partnered to buy Heinz’s equity at $72.50 a piece, 19% above its all time high and 30% above its one-year average price. This is also around 25% higher than our our $57 price estimate for Heinz. To justify this premium, we believe that Heinz would need to capture greater global market share in its main condiments business and improve the profitability of the Heinz’s portfolio.  ^[1]

Check out our complete analysis of H.J. Heinz Company

Heinz Stands Tall on Brand Equity and Global Portfolio

Heinz, a global player in manufacturing and marketing a wide range of processed food products, primarily deals in ketchup, condiments, sauces, frozen food, soups, baked beans, pasta meals, infant nutrition and other processed food products. Heinz Ketchup, one of the key brands of the company, holds 60% share in the U.S. ketchup market, 70% in Canada and about 80% in the U.K. Other popular brands of the company include Classico sauces, Ore-Ida selling potato-based frozen foods and Weight Watchers Smart Ones selling low fat, low calorie and high fiber meals to diet conscious consumers.

The key factors driving such high valuations for the company are world class iconic brands and a strong global portfolio, with around two-thirds of sales coming from outside the U.S. and almost 25% of sales coming from emerging markets during the last quarter.

Berkshire Hathaway, 3G Capital Expand Their Menu

Berkshire Hathaway, the Oracle of Omaha’s investment company that among other assets also owns minority stakes in Kraft Foods (NASDAQ:KRFT) and The Coca-Cola Company (NYSE:KO), now also owns 50% of world famous ketchup, Heinz. The deal as described by Warren Buffett himself is his kind of deal, an investment in a fairly predictable business, with a comparably low price elasticity for demand and deals in a product that sells by name. 3G Capital that owns more than 70% of Burger King (NYSE:BKW) is known for pushing the company’s turnaround through geographic and menu expansion, aggressive advertising campaigns and efficiency drive led by increased implementation of lower cost franchisee-owned model. It would also be responsible for managing operations at Heinz going forward.

Although valuations are arguably high given the current outlook which is factored into our $57 price estimate, aggressive expansion in the emerging markets over the coming years coupled with faster decision making under private ownership and leaner, efficient operations, could potentially make the valuations look fair.

According to our estimates if the company is able to increase its market share in the global ketchup, condiments and sauces market to around around 14% over the forecast period from current 10.7%, along with pushing EBITDA margins of the segment to more than 22% from current 18%, the $72.50 valuation would look reasonable.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. H.J. Heinz Company Enters Into Agreement to Be Acquired by Berkshire Hathaway and 3G Capital, February 14th 2013, Heinz.com [↩]