Is Buffett overpaying for Heinz?

February 15, 2013, 8:33 PM UTC
Warren Buffett

FORTUNE — Part of the mystique, and down-home charm, of Warren Buffett is the belief that most of all he is always looking for a good bargain. Did he get one with Heinz? It’s not so clear.

Buffett is best known for having bought up large stakes in companies like Coke (KO), Geico, Gillette and Wells Fargo (WFC) at what at least in retrospect were cut-rate prices. But as Buffett’s acquisitions have gotten bigger and bigger over the years, and the market has changed, the idea of Buffett as extreme value hunter has become more image than reality.

Even in the context of some of Buffett’s biggest deals, Heinz looks expensive. Back in 1998, Buffett’s Berkshire Hathaway (BRKA) paid $22 billion for insurer to insurers General RE, a 25% premium to where its stock traded at the time. And pretty soon after the deal the company hit a rough patch. In the end, the deal has worked out, but it’s not clear that’s because Buffett got the best price.

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In 2010, Berkshire paid $34 billion for railroad Burlington Northern, or $100 a share. That was a 30% premium to where Burlington’s stock traded at the time. It was also 18 times the company’s expected earnings that year. But Buffett argued he was making a bet on a U.S. recovery and the fact that U.S. exports, particularly to Mexico, would rise. What’s more, Burlington’s stock had been as high as $110 just two years earlier, so it didn’t seem that Buffett was buying at a high. And Burlington has turned out to be a very good acquisition for Berkshire.

Buffett’s Berkshire is buying Heinz along with Brazilian private equity firm 3G Capital. Together the two firms are going to pay $28 billion, including the company’s existing debt. Existing shareholders will get $72.50 a share, a 20% premium from the $60 Heinz’s shares had been trading at just before the deal.

But unlike Burlington, Heinz isn’t a beaten down stock. Heinz shares are up nearly 27% in the past two years, nearly double the return of the S&P 500 in the same time. What’s more, the acquisition values the company at 20 times this year’s expected earnings, seemingly high for a company with a bottom line that’s growing by just 6%.

Complicating things is the way the deal was structured. Buffett is putting roughly $12 billion into the deal. He’s getting back $4 billion in regular shares, and $8 billion in preferreds, which will pay a dividend of 9%. Factor in the dividend and Buffett is buying into Heinz at more like 9 times the company’s earnings plus his payout.

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But the deal will include more leverage than Buffett is used to. 3G, which was found by Jorge Paulo Lemann, who met Buffett on the board of Gillette, is putting up just $4 billion in cash for its side of the deal. It will raise $7 billion in debt to pay for the rest of the deal. Combine that with what Heinz already owes its creditors, and the company after the deal will have about $12 billion in debt. That will result in a leverage ratio, based on cashflow, of about 6.5 times, which is only slightly higher than the typical deal these days.

But that’s before Buffett’s preferred shares, which look a lot like debt with a 9% payout, even if they are technically preferred stock or equity. Factor that in and the Heinz deal has considerably more leverage. And making payments on all that debt is bound to lower Heinz’s earnings, which makes the deal more expensive than it appears.

In the end, Buffett is part of today’s deal environment as much as anyone else. Private equity firms have been looking to put cash, which has been piling up during the recession and slow recovery, to work. What’s more, low interest rates and healthier banks are creating a surplus of cheap financing. That’s driving up the cost of deals for everyone.

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What’s more, Buffett has a history of being a hands-off acquirer. It’s one of the reasons he is able to get deals that others can’t, at prices others can’t get. 3G, though, like private equity firms, has tended to be a more active investor than Buffett. If that’s the case with Heinz, Buffett could lose his most favored acquirer status, diminishing his ability to pay down for deals in the future.

Bottom line: the Heinz deal, like the recent Dell (DELL) LBO, means that large private equity buyouts and mergers in general, are likely going to get bigger, more common and more expensive, even for Buffett.