Heinz deal an industry milestone

by Staff
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PITTSBURGH — The pending $28 billion acquisition of The H.J. Heinz Co. by Berkshire Hathaway Inc. represents a validation of fundamental change across the entire consumer packaged foods business over a number of years, said James E. Neely, vice-president, Booz & Company Inc., Cleveland. The success Heinz has achieved supports the idea of considerable growth potential even for businesses that are mature and could be characterized as “unexciting,” he said.

The comments by Mr. Neely followed the Feb. 14 announcement that an investment consortium including Berkshire Hathaway and 3G Capital has entered into a definitive agreement to acquire Pittsburgh-based Heinz. The company’s shareholders will receive $72.50 in cash for each share of common stock they own, a 20% premium to Heinz’s closing share price of $60.48 on Feb. 13.

“Heinz is being acquired from a position of strength,” said William R. Johnson, Heinz chairman, president and chief executive officer. “As a private enterprise, Heinz will have an opportunity to drive further growth and advance our commitment to providing consumers across the globe with great-tasting, nutritious and wholesome products.”

The transaction is subject to regulatory and shareholder approval and is expected to close during the third quarter of calendar year 2013.

While upbeat about the outlook for the food sector, Mr. Neely said media reports suggesting the acquisition of Heinz represents the start of a wave of food/beverage industry takeovers in the months and years ahead may be premature.

“There are a lot of people talking about the coming wave of acquisitions,” he said. “They are asking, ‘Is General Mills next?’”

While he wouldn’t be surprised if additional mega-deals are announced in the near future, the “next big thing” isn’t especially likely to be a food or beverage company takeover, he said.

“Heinz represents a wonderful deal for Berkshire Hathaway, but I don’t necessarily believe it triggers a wave in consumer mergers and acquisitions,” he said. “It is just as likely the next large one will be in transportation or manufacturing.”

Mr. Neely described what happened at Heinz as a tale of success with other analogues indicative of change under way in the packaged foods business.

“Heinz itself is a great story,” he said. “They have successfully gotten their portfolio aligned around certain capabilities. Others have made similar changes. Kraft carved out grocery business from snacks. Sara Lee pared its portfolio to a North American meat business and an international coffee business. It’s all about getting a portfolio tight.”

Looking more specifically at Heinz, Mr. Neely said the company several years ago began shedding many of its businesses so that it could focus on its four top brands (Heinz, Weight Watchers, Ore-Ida and Smart Ones) and specialty sauces in an effort to “drive real growth, driving it internationally.”

“Heinz started becoming something that is right in the sweet spot of what Berkshire looks at — a well understood business, well positioned in the marketplace, consumer oriented with iconic brands,” he said. “It’s a stable kind of business. Ketchup is stable and has upside. There are real legs in terms of growth potential.

“The upside on Heinz is international markets. More generally, this reaffirms a story in consumer products we’ve been writing on for about a decade on how portfolios are realigning. Those that are focused plays really drive
performance — even in categories that don’t seem so exciting. But there is a lot of innovation you can do when you become really focused on a category.”

As part of that realignment there has been a recognition that food portfolios don’t fit well in consumer product companies principally engaged in the non-food sphere.

“If you look at consumer packaged goods in general, Procter & Gamble is getting out of anything that looks like food,” he said. “They are focused on global growth through technological innovation. And they couldn’t make the science they wanted work with food, in the case of Olestra.

“Companies focused on food are doing well with food. Smucker is doing well with the food businesses P.&G. didn’t want.”

Beyond P.&G. has come a recognition that the capabilities needed to succeed in food are very different from other segments of consumer packaged goods, Mr. Neely said.

“The innovation cycles are different,” he said. “The margins, the exposure to commodities all set food apart. Within food it will be interesting to watch how Kraft and Mondelez do. There are different product sets and different capabilities between the two companies. Kraft North America is a warehouse-based delivery model. Snack is very different with direct-store delivery. Both have the potential to achieve attractive returns.”

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