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Warren Buffett

Local investors with a strong appetite for branded food businesses such as Tiger Brands and AVI will relish the news that Warren Buffett - widely regarded as the world's canniest investor - has taken a large helping of one of the oldest companies in the food industry.

Last week a consortium comprising Buffett's investment company Berkshire Hathaway and 3G Capital paid US$28bn to acquire HJ Heinz Company, which is best known for its beans, pasta, infant foods, soups and iconic "ketchup" (tomato sauce) brand.

The staggering sum the consortium paid for Heinz is twice the size of the collective market capitalisation of the JSE's entire food products board, which includes Tiger Brands and AVI.

Heinz fits into Buffett's homespun "invest in things that are easy to understand" philosophy and complements Berkshire Hathaway's existing investments in consumer brand holdings like Coca-Cola and Kraft.

The most intriguing part of the deal was the consortium's willingness to pay a large premium for Heinz stock.

The deal was struck at $72,50/share, a sizeable 20% premium on Heinz's closing share price of $60,48.

What's more, the buy-in price represented a 19% premium on Heinz's record high share price, a 23% premium on the 90-day average share price and a 30% premium on the one-year average share price.

Heinz generated revenue of $11,6bn in the 2012 financial year, which translated into net income of $923m. That suggests the Berkshire Hathaway/3G consortium was prepared to buy into Heinz at a demanding p:e ratio of almost 30 times. Tiger Brands and AVI trade on p:es of around 17,5.

Though this may not sit well with value investors, Heinz CEO William Johnson pointed out that Heinz was being acquired from a position of strength after 30 consecutive quarters of organic top-line growth.

At the end of 2012 Heinz forecast operating free cash flow of $1,1bn for the 2013 financial year.

In November last year Heinz reported that first-half sales for the 2013 financial year had increased by 4% on an organic basis to $5,62bn. Net income from continuing operations grew 23% to $569m.

In a statement released after the deal, Buffett reiterated that Heinz had strong sustainable growth potential.

 

The Lowdown

Backing basic brands

Deal done at premium