Case Analysis of H J Heinz Company

University of Santo Tomas College of Commerce and Business Administration SY 20202021 CASE ANALYSIS H J Heinz MA Prepared by Marfori Juan Miguel G Castaneda Therese Alliah M Chozas Samantha Erica M Santos Tricia Nicole B 3FM4 Submitted to Prof Gavino Sagarino Submitted on October 18 2021 Introduction Henry J Heinz founded the H J Heinz Company in 1869 and it has been in business ever since He sold his first product bottled horseradish in Sharpsburg Pennsylvania Pittsburg Pennsylvania served as the companys headquarters and was founded in 1900 Condiments frozen foods infant nutrition and other similar items are among the products available The majority of their products are wellknown in the country because they are a part of one of the first food processing companies to be established in the United States HJ Heinz was acquired by 3G Capital and Berkshire Hathaway in 2013 through a joint acquisition and merger In 2015 the company announced the successful merger of Heinz and Kraft which was arranged by Berkshire Hathaway and 3G Capital As a result of the merger the company was renamed Kraft Heinz Company and grew to become the worlds fifth largest food company Mission and Vision Mission As the trusted leader in nutrition and wellness Heinz the original pure food company is dedicated to the sustainable health of the people the planet and our company Vision To sustainably grow by delighting consumers globally Firms competitive advantage The competitive advantages that H J Heinz Company offers 1 Heinz beta 00651 which is less than the industry beta mean of 00782 The market Beta of Heinz is lower than the industry average which means the company is less volatile compared to its competitors 2 After the acquisition 2014 Heinzs ROA ROE and Dividend per share significantly increased compared to industry average It means that Heinz is doing a good job in converting their assets into profits In return Heinz net sales increased Therefore Heinz signifies that it is more efficient and profitable compared to its competitors Heinz companys management is utilizing their equity capital well In which Heinz succeeded in generating more profit without the need to invest more capital Having a high dividend per share indicates that Heinz is financially stable and performing well amidst its market condition An increase in Dividend per Share is a good indicator that supports the idea that the management sector is rest assured in Heinzs future profits 3 Heinz is identified as a strong brand cash flow is strong and consistent SWOT Analysis Strengths Heinz has been a popular brand since 1896 It offers a variety of products A leading company in terms of food processing Heinz introduced prepacked food and condiments to the market Weaknesses High debt Weak Financial Leverage Weak domestic sales Opportunities Heinzs entrance into the emerging market pleased investors The opportunity to be a market leader during that time A clear market leader is yet to be crowned According to economists BRIC will overtake G7 countries Strong global sales Threats Strong competition with The Hershey Company Nestle PepsiCo Inc and Smucker Heinz one of the leading food products companies in the world competed with companies on multiple fronts Although few competitors offered exactly the same robust line of products the following companies posed continued threats to Heinzs market share Conclusion and Recommendations The group believes that the acquisition of Heinz is a good deal With a 7250 acquisition price per share and upon the joint acquisition and merger by 3G Capital and Berkshire Hathaway This resulted in a 1401 increase in stock price after a month from January 2013 signifying a positive feedback from the market Additionally having a company average debt to equity ratio of 163x from 2011 to 2014 the company did not rely much on debt financing and would be subject to less risks when paying their creditors in the event that there would be liquidation compared to strong competitors Groupe Danone and Nestle SA having an average debt to equity ratio of 210x and 508x respectively in the given time period When it comes to beta Heinzs 0651 is relatively lower than that of the industrys average beta giving room for aggressive decision making Also we believe that Heinz under the management of the partners can maximize their opportunities in the industry given that a market leader has yet to be identified QUESTIONS FOR THE CASE 1 Discuss the positions of various stakeholders including Heinz shareholders management employees and citizens of Pittsburgh Six years prior to the companys acquisition complaints from activist investor Nelson Peltz were received by Heinzs management upon experiencing quarterly losses during the market boom prompting the company to implement immediate reform In 2006 Heinz underwent significant restructuring to improve their management devised strategies and goals to propel the company forward While this improved the companys position it became a cause for 2700 employees to lose their jobs The agreement was finalized and upon acquisition several supervisors found it unappealing and unacceptable but had to push through as their shareholders approved the decision Furthermore both companies were able to keep the same administration and maintain employee collaboration Heinz has long placed a high priority on food safety and consumer wellbeing as evidenced by the companys mission An assurance to the residents of Pittsburgh was delivered when CEO Johnson stated that there were no plans to shift the companys original headquarters after learning from experience Moreover it may view the acquisition as beneficial to citizens in the sense that the merged company will be able to provide them with varied products and services 2 Discuss the goshop process explaining why it may be necessary and listing any risks associated with it During a merger and acquisition MA agreement the acquiring party would propose to the target company a specific amount of money to compensate its stakeholders due to the foreseeable acquisition The goshop process is a stage in an MA agreement that occurs within a limited period of time usually up to 2 months wherein the target company can have the time to search for competing companies that would be willing to offer higher bids than the initial acquirer in the agreement This process may be necessary because of the possibility that the target company can find another party that might be able to give better offers than the initial acquirer With better offers the target company would be able to compensate their stakeholders in a greater way for deranging their commitment with the company However companies do not typically offer higher bids than the initial acquirer as they are bound by time constraints The period of 2 months sometimes shorter depending on the agreement between the parties involved in the MA agreement is too short for companies to review the prospects of the firm that they would possibly acquire Aside from this the new acquirer would have to pay for a breakup fee for disrupting the ongoing agreement between the two companies aside from its bid that must be higher than the agreed acquisition price initially and might be a reason to have an adverse relationship with the initial acquirer With 3G and Berkshires offer of 28 billion to acquire Heinz it would be too costly for other companies to propose with a higher bid unless they are truly willing to take on the risks that the acquisition entails and would be able to maximize the time to examine the prospects of the company under consideration 3 Why were so many investment bankers involved in this transaction and what were their respective roles Investment banks were directly involved in the transaction It was mentioned that JP Morgan Lazard and Well Fargo were retained by 3G and Berkshire Hathaway as advisors of the acquiring companies on providing fair opinions during the transaction On the other hand the advising banks for Heinz include Bank of America Merrill Lynch Centerview and Moelis Co with the same agenda the only difference is that they were advisors for the board of Heinz during the deal The investment banks involved in this transaction would play significant roles as representatives for both parties in establishing a fair value for the company to be acquired But these banks shall only be obliged to perform its duties to only one among the two parties which gives them the capacity to advise on different aspects of the deal Furthermore they would discuss the foreseen advantages of the deal and also its downsides to the shareholders of both parties in the event that the deal would push through Their respective roles in mergers and acquisition is to communicate to the other partys investment banker by means of discussing and evaluating the deal They would also somehow study the factors and trends affecting its performance in the market In which Heinz board and advisors discussed the trends that negatively gave an impact to Heinz Also they consider alternatives to a sale including remaining a standalone company or pursuing acquisition by another company in the food and beverage industry Conducting strategic plans and even financial projections could be done by the advisors to help them determine future scenarios that might affect the market value of the company before proceeding to its final decision Approval of the acquisition would only be ratified if the advisors will present to the Heinz board their opinions from their financial perspective that the acquirers offers were fair 4 What was the acquisition premium Was this reasonable The original joint offer from Leman and Buffet in acquiring HJ Heinz is at 7000 per share of the outstanding common stock The board of directors discussed the possible scenarios for the future of the firm and formulated a new strategic plan and financial projections with their advisor Different factors were also discussed by the board and advisors which include trends that negatively impact the company and other interested parties pursuing the firm The board of directors informed the party of Leman and Buffet that the company is no longer willing to entertain the acquisition without improved financial terms 3G and Berkshire Hathaway agreed and provided a revised proposal and offered 7250 per share for a total of 28 Billion The acquisition premium which is 2367 is reasonable provided that the company is 1 profitable 2 expected to continue improving its position from the 2006 slump 3 the US economy is showing signs of improvement from the 20082009 financial crisis 4 opportunities from the food and beverage industry are visible according to economists 5 geographic expansion in China Russia India and the Latin America Region provide yields in investments A market leader in the industry has yet to be pronounced and in line with the expansion economists also projected that BRIC countries will overtake G7 countries in economic growth by 2027 5 Why did this transaction propose zero synergies Discuss and quantify potential synergies that could be realized including where they come from and the period of time over which they can be realized and quantify the impact on enterprise valuation Partners Berkshire Hathaway and 3G Capital own multiple brands under the food sector with Berkshire Hathaway owning Sees Candies The Pampered Chef Mars Inc and Dairy Queen while 3G Capital is the owner of the fast food chain Burger King Heinz on the other hand was a renowned brand focused on producing condimentary products still in the threshold of the food industry Berkshire and 3G decided that it would be best for Heinz to be a standalone company and therefore proposed a transaction with zero synergy as a strategy despite the industrys 32 median synergy In 2015 Heinz announced the successful merger between Heinz and Kraft now known as Kraft Heinz Assuming that Berkshire and 3G continued with the 32 synergy in 2013 economic benefits that the synergy would contribute to both parties would not be maximized as companies and products under the partnership of Berkshire and 3G and Heinz are not that correlated Contrastingly the merger between Heinz and Kraft was expected to show significant results Annual savings of 15 billion are to be expected as both companies have similarities with their offered products and the same supply chain thus utilizing the economies of scale This merger is more powerful and can result in a better ROI compared to the merger in 2013 Both companies can also gain from having a wider range for product distribution with Kraft products generating stronger sales domestically and Heinz internationally The complete effect of the synergy is expected to materialize in 2017 providing investors of at least 3 dividend yield and a recession proof portfolio since the company is considered an essential part of the economy 6 What was the reason for an allcash transaction and what are the disadvantages of this form of consideration as opposed to using common shares as consideration What are the principal risks and benefits of this transaction for 3G and Berkshire Hathaway Berkshire and 3Gs initial offer for the acquisition of Heinz was originally at 7000 per outstanding share And while this can be seen as a good deal Heinz decided that their company was worth more than that and asked for a better proposal resulting in a final acquisition price of 7250 per share in cash By going with an allcash transaction the partnership expressly shows their interest in going through with the deal Taking the risk of a massive decrease in their cash account the ultimate measure of a firms liquidity they were able to secure the acquisition of Heinz As a result of an allcash transaction the acquiring companies can prevent agency conflicts that may arise from using common shares as consideration Present shareholders of the firms would maintain having their right to vote and there would be no new investor that might show interest in acquiring a majority of their shares preventing the dilution of ownership The drawback of this form of transaction on the other hand is that the acquiring company would experience a remarkable decrease in their cash account In the event that the partnership has to settle payments for their other transactions liquidity problems might arise as the partnership previously withdrew billions of dollars from their accounts Annex EXHIBIT 1 HEINZ FINANCIAL AND MARKET INFORMATION HEINZ SHARE PRICE JANUARY 222007 JANUARY 222013 HEINZ SHARE PRICE NOVEMBER 1 2012 APRIL 1 2013 EXHIBIT 2 COST OF DEBT FOR HEINZ US IN THOUSAND HEINZ TAXES HEINZ FINANCIAL FORECAST US IN MILLIONS EXCEPT PER SHARE DATA EXHIBIT 3 HEINZ HISTORICAL FINANCIAL STATEMENTS US IN THOUSANDS EXCEPT PER SHARE DATA UNLESS OTHERWISE SPECIFIED CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CASH FLOWS EXHIBIT 4 COMPARABLE COMPANY METRICS GROWTH ANALYSIS PROFITABILITY ANALYSIS RETURNS ANALYSIS LEVERAGE ANALYSIS VALUATION ANALYSIS 1 VALUATION ANALYSIS 2 References Corporate Finance Institute 2021 February 18 GoShop Period httpscorporatefinanceinstitutecomresourcesknowledgedealsgoshopperiod Fernando J 2021 October 13 Debttoequity DE ratio Investopedia Retrieved October 17 2021 from httpswwwinvestopediacomtermsddebtequityratioasp Kraft Heinz Merger progress NASDAQKHC SeekingAlpha nd Retrieved October 17 2021 from httpsseekingalphacomarticle3967415kraftheinzmergerprogresspage2 Merger update Kraft Heinz zeroes in on efficiencies synergies 2016b April 25 Food Dive httpswwwfooddivecomnewsmergerupdatekraftheinzzeroesinonefficienciessynergies418025 Nickolas S 2021 September 21 What does dividend per share tell investors Investopedia Retrieved October 14 2021 from httpswwwinvestopediacomaskanswers032715whatdoesdividendsharetellinvestorsasp Return on assets amp roa formula Corporate Finance Institute 2021 June 4 Retrieved October 13 2021 from httpscorporatefinanceinstitutecomresourcesknowledgefinancereturnonassetsroaformula Return on equity ROE Corporate Finance Institute 2020 March 1 Retrieved October 13 2021 from httpscorporatefinanceinstitutecomresourcesknowledgefinancewhatisreturnonequityroe W 2017 September 8 HJ Heinz MA Case Solution And Analysis HBR Case Study Solution Analysis of Harvard Case Studies TheCaseSolutionsCom httpswwwthecasesolutionscomhjheinzma567748 Wikipedia contributors 2021 October 13 Heinz Wikipedia httpsenwikipediaorgwikiHeinz