Case study Berkshire Hathaway and 3G Buy Heinz

Risk to existing bondholders is that one day they own an investment grade firm with a modest amount of debt and the next day they own a highly leveraged firm facing a potential downgrade to junk bond status. On the announcement date, prices of existing Heinz triple B rated bonds fell by over two cents on the dollar, while the cost to ensure such debt (credit default swaps) soared by over 25% to a new high. The structure of the deal is described in Figure 13.3.H.J. Heinz Company, a Pennsylvania Corporation, entered into a definitive merger agreement with Hawk Acquisition Holding Corporation (Parent), a Delaware corporation, and Hawk Acquisition Sub (Merger Sub), Inc., a Pennsylvania corporation and wholly owned subsidiary of Parent. The agreement called for Merger Sub to merge with Heinz, with Heinz surviving as a wholly owned subsidiary of Parent.

Berkshire and 3G acquired one-half of the common stock of Parent for $4.12 billion each, with Berkshire also purchasing $8 billion in 9% preferred stock issued by Parent, bringing the total cash injection to $18.24 billion. The preferred stock has an $8 billion liquidation preference (i.e., assurance that holders are paid before common shareholders), pays and accrues a 9% dividend, and is redeemable at the request of the Parent or Berkshire under certain circumstances.The use of preferred stock has been a hallmark of Berkshire deals and has often included warrants to buy common stock. Parent used the $18.24 billion cash injection from Berkshire and 3G (i.e., $14.12 from Berkshire + $4.12 from 3G) to acquire the common shares of Merger Sub. J.P. Morgan and Wells Fargo provided $14.1 billion of new debt financing to Merger Sub. The debt financing consisted of $8.5 billion in dollar-denominated senior secured term loans, $2.0 billion of Euro/British Pounds senior secured term loans, a $1.5 billion senior secured revolving loan facility, and a $2.1 billion second lien bridge loan facility.Total sources of funds equal $32.34 billion, consisting of $18.24 in equity plus $14.1 billion in debt financing.

The deal does not contain a go shop provision, which allows the target to seek other bids once they have reached agreement with the initial bidder in exchange for a termination fee to be paid to the initial bidder if the target chooses to sell to another firm. Go shop provisions may be used since they provide a target's board with the assurance that it got the best deal; for firms incorporated in Delaware, the go shop provision helps target argue that they satisfied the so-called Revlon Duties, which require a board to get the highest price reasonably available for the firm. While Heinz did not have such a go shop provision, if another bidder buys Heinz, it will have to pay a termination fee of $750 million, plus $25 million in expenses. If Berkshire and 3G cannot close the deal they must pay Heinz $1.4 billion before they can walk away.

1.Identify the form of payment, form of acquisition, acquisition vehicle, and post-closing organization?Speculate why each may have been used. Do you think it was successful and why?

2.How was ownership transferred in this deal? Speculate as to why this structure may have been used? Do you agree or would have had a different structure in mind?

3.Describe the motivation for Berkshire and 3G to buy Heinz. Do you agree and why?

4.How will the investors be able to recover the 20% purchase price premium? Be detailed with your responses.

5.Do you believe that Heinz is a good candidate for a leveraged buyout? Explain your answer.

6.What do you believe was the purpose of the $1.5 billion senior secured revolving loan facility, and the $2.1 billion second lien bridge loan facility as part of the deal financing package?Was it successful?

7.Why do you believe Berkshire Hathaway wanted to receive preferred rather than common stock in

exchange for its investing $8 billion? Would you have recommended another payment method and why?