# Warren Buffett Heinz investment



## sinner (4 June 2013)

Lots of news out that the EU has approved 3G Capital + WB takeover of Heinz.

Just like when the deal was announced, I am seeing a lot of commentary about how he is paying 20 times earnings when he is supposed to be a value investor.

This seemed a little silly to me. Research I've done for US markets indicates that even in the cheapest value deciles you can't really avoid paying a higher multiple in years when the overall market is more expensive compared to years when the overall market is cheap. 

But is Buffett really departing from his playbook? Heinz is a low beta (~0.53), large, quality name so it fits the universe criteria. What about value? Well the price certainly had been on the run, demonstrating some nice momentum and the announcement of the deal driving the price from $56 to >$70. I decided to plug some numbers into the Money Chimp "WB IV Formula" which I found from a quick google:

http://www.moneychimp.com/articles/valuation/buffett_calc.htm

Even the most conservative numbers I plugged into the tool seemed to indicate that even at $70, HNZ was quite cheap. For example, estimating $3.10 for EPS, 0% growth in the short and long term, 100% certainty of outcome with a 3% risk free rate values the company at $103. EPS would need to decline by $1 to price such a conservative outcome to ~$70. Alternatively, using a risk free rate of 2% (approx value of US 10Y yield the day deal was announced) prices the company at $155. The interest rate would need to rise to 4.5% to price this outcome to ~$70.

So for me it doesn't really seem like a departure for WB.

I'm interested to hear what others with more experience in valuation have to say.


----------



## Macros (5 June 2013)

I think there are two parts to this.

Firstly is the long term value of the company and secondly is the timing of purchase.

As to the long term value of Heinz, I think it fits in well with Buffet's typical strategy. It is a very profitable company that has stability, a quality franchise and has consistently grown value.

However I think the timing is the problem. I think that the US markets are fully priced and have the potential for a reasonable correction. The share price has moved up substantially in recent times. Why not wait for a better price? I'm guessing that he increasingly has a motivation to secure long term assets in case his health declines. Therefore he is probably less worried about the price paid.

​


----------



## craft (5 June 2013)

sinner said:


> Lots of news out that the EU has approved 3G Capital + WB takeover of Heinz.
> 
> Just like when the deal was announced, I am seeing a lot of commentary about how he is paying 20 times earnings when he is supposed to be a value investor.
> 
> ...




He’s only putting 4 Billion into common equity.  8 Billion is in the form of  9% Preference Shares – considering they recently sold  5 year paper for 1.3% it’s not hard to see the attraction of the preference shares.  There’s also a bunch of cheap warrants as part of the deal giving flexibility if they want to up their stake latter.

Sweet deal – Nice preference yield considering the current financial repression. Private equity to run and tighten the ship. Effective control through the warrants and timing opportunity for additional investment.

Company is a hallmark Buffett consumer franchise and deal is the size he needs to accommodate the cash flow from existing investments.

I suspect the Money chimp calculator would be giving you zero insight into how Buffett assessed the value.


----------



## McLovin (5 June 2013)

craft said:
			
		

> 8 Billion is in the form of 9% Preference Shares




This is a real kicker to the deal. He bought Goldman prefs at 10%, back in dangerous days, so getting Heinz at 9% is a great deal. Plus, the added benefit of taking prefs over debt is the difference in the tax rate (15% v 35%). If you like cash coming in the door then a 7.65% after tax yield is pretty tidy, even more so these days.

I haven't looked at the FY2012 (ended May '13) report for Heinz, but in 2011, the organic growth in Ketchup and in emerging markets was pretty strong. Emerging markets have gone from single digit % of sales to 25% over the last decade.

Fair bit of debt on the books now.


----------

