Heinz: Buffett buyout gets even less Buffett-y
FORTUNE — In mid-February, when the deal to buy Heinz was announced, Warren Buffett gave Heinz’s CEO a vote of confidence. “I think Bill Johnson has done a very good job of running the company,” Buffett told CNBC.
Two months later, Johnson is out of a job.
On Thursday, Buffett and 3G, the Brazilian buyout firm that the legendary investor and chief executive of Berkshire Hathaway (BKW) partnered with to buy Heinz, revealed that they plan to install Bernardo Hees, the current CEO of Burger King, as the new CEO of the ketchup company when their takeover is complete.
Here is the typical Buffett playbook:
- Buy great companies at low prices.
- Use cash to make acquisitions, rather than pile on debt.
- Leave existing management in place.
And here’s how the Heinz deal is shaping up:
- Buffett and 3G are paying 20 times earnings, even though profits at the ketchup company are only growing 6% a year.
- The deal will more than double the amount of debt Heinz has to $12 billion.
- Top management is out.
Does any of this mean the Heinz (HNZ) deal is likely to go south? Not necessarily. Although Buffett says he doesn’t like leveraged buyouts, and that Heinz isn’t one, they’ve worked for others, namely 3G. What’s more, Hees’s recent track record has been pretty good.
Hees joined Burger King (BKW) in 2010, shortly after the company was bought in a leveraged buyout by 3G. Before that, Hees worked at 3G. He appears to have done a nice job turning around the troubled fast food chain in the past two and a half years. He has expanded the company overseas and BK’s profits rose by a third last year. Shares of the company are up 28% in the past year.
But Hees achieved a good portion of that improvement through cost cutting, eliminating about half of BK’s corporate office workforce. What’s more, it’s not clear that Heinz is in need of a turnaround. Even before the acquisition was announced the company’s stock was up nearly 30% in the past two years, which was better than the S&P (SPX). And one of the smartest investors on the planet — that is, Buffett — thought its CEO was doing a fairly good job. Is it really clear Hees will do better?
But the real question is why is Buffett ditching his playbook?
From the beginning, Buffett said that 3G was going to be the majority owner of Heinz and that it would be driving the acquisition. So it’s not really Buffett who is abandoning his playbook.
But why is he going along for the ride? Part of the answer, I suspect, is that Buffett thinks he doesn’t have much of a choice. Berkshire has grown and is now producing a lot of cashflow, and Buffett needs a place for that cash. Private equity buyers have been paying more and more for deals. Buffett is being priced out of the acquisition market.
So teaming up with 3G allows Buffett to put $12 billion of Berkshire’s money to work in a company that he says he has been watching for years. Buffett gets warrants that make the deal more lucrative, and cheaper. And 3G gets to use Buffett as PR cover. The Brazilian firm faced backlash when it bought Anheuser Busch a few years ago. How can you call a deal un-American when it includes Warren Buffett? So it’s a win, win.
Still, it’s a risk for Buffett. Even he says his status as a favorite acquirer has helped him get deals that others can’t at prices others can’t. That, it seems, is part of his special sauce. More deals like Heinz could spoil that.