Warren Buffett's Berkshire Hathaway (NYSE:BRK-B) teamed up with Brazilian investor Jorge Paulo Lemann to buy ketchup giant Heinz (NYSE: HNZ). At a 20% premium to yesterday's closing price and easily an all-time high share price, Heinz investors -- including the family of Secretary of State John Kerry -- are getting a great deal.
Berkshire and Lemann's 3G Capital will split Heniz's equity (about $4 billion each, according to Buffett), while Berkshire is putting up more cash in exchange for preferred stock. Berkshire will put up about $13 billion in cash -- a decent chunk of the $47 billion cash it held at the end of September.
On CNBC this morning, Buffett said 3G will handle Heinz's operations. "[3G] is our partner, but it's their baby from an operational standpoint." So even though Heinz is being purchased in its entirety, this deal from Berkshire's point of view is more akin to purchasing a passive stake of common stock in the open market, rather than the whole takeovers Buffett has done in the past, like the purchase of Burlington Northern.
The business is classic Buffett -- a 150-year-old company with an iconic brand and a product Buffett says "he's sampled many times." What's odd is the price. Buffett and Lemann are paying a rich valuation of about 20 times earnings. Asked why he was willing to pay such a premium, Buffett joked: "I'm never willing. They drag me to the alter, always," and proceeded to talk about the strength of Heinz's brands. Time will tell how it plays out.
With a market cap of almost $250 billion, Berkshire needs big deals to move the needle. Buffett calls them "elephant deals."
"I'm ready for another elephant. If you see any walking by, please, call me," he said this morning.