Investment Banking Case Study: H.J. Heinz M&A (KEL848)

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Heinz has been very successful in the retail food industry, particularly in the production of sauces and condiments. It is a multinational food producer and has always been competitive in the global marketplace. It has established its name in the production of pre-packed branded foods. On the other hand, 3G Capital is a multinational, which focuses on the long-term value of brands and businesses, particularly on emphasizing their potentials. It has been known globally for a long time due to its operational excellence, management involvement, expertise, and extensive global network.
Meanwhile, Berkshire Hathaway ranked third on the list of largest public companies in the world, according to Forbes Global 2000. It was also on the tenth place on the list of largest conglomerates based on revenue and was proclaimed to be the most significant financial services company in the whole world. These companies are well known, and it is no doubt that their merger will bring them more profits and success in the future.
In 2013, 3G Capital and Berkshire Hathaway offered Heinz that they would acquire 100% of the shares of the latter. After various negotiations, the offer was accepted, and the merger transpired. For the offer to be accepted, many factors were considered, especially the selling price of the shares. Upon comparison of the price offered by 3G Capital and Berkshire Hathaway with the closing price of the shares on the day before the day of the sale, it was proven that it was a lot higher.
The board of directors of Heinz made a unanimous decision on the Company's merger with Berkshire and 3G. Heinz’s shareholders were in favor of the proposal, mainly because they are being acquired by an entity that has established itself in the industry. Since they own shares of the Company, shareholders are entitled to the right to vote and to protect the whole Company from the potential risks associated with the transaction. Should the merger transpire, they will receive $72.50 in cash for each common stock they own. This was considered an excellent deal for the shareholders of Heinz as this means an almost 30% premium to the estimated fair value of $56 and a 20% premium to the closing stock price on the day before the announcement. The offer was in favor of, not only because of the amount they will receive but also because they were not performing very well recently, as shown in their new fundamentals.
Heinz’s management was also excited about the merger since this will mean expansion and exposure to more significant opportunities for the Company as a whole. Their principal role includes the protection of shareholders by always making sure that they are informed and engaged in the deals and agreements entered by the Company. Furthermore, Heinz’s management is also tasked to engage its employees in addressing various employee concerns.
3G Capital and Berkshire Hathaway were interested in merging with Heinz because the latter has a strong branding, discipline in its cash flows, and robust management. The acquirer also believed that Heinz will potentially have a step-up in its profit margins a few years from now as it completes its overhaul of information systems. For 3G Capital and Berkshire Hathaway, Heinz is a good investment since this has been operating well for the last few years, particularly in the food industry. Further, Heinz has always been competitive in the global marketplace.
I performed the three valuation methods for us to come up with a conclusion of whether the merger was a good deal or not. These 3 are the discounted cash flow method, the comparable analysis, and the precedent transaction analysis. These 3 have different ways of determining the value of assets, but all of them may be used for any asset.
The use of discounted cash flows for the valuation of various types of assets, which is vital in the decision-making process of companies. This is a popular method and is used by many because of its accuracy since it takes into account the time value of money, and also considers interest rates (Janiszewski, 2011). Based on the computation made using the discounted cash flows method, the estimated value of the Company is $49.6 billion or a value per share of $143. We made use of the following assumptions in solving: revenue grows at 3% every year, EBIT margin is at 16%, capital expenditure is at 2.65%, depreciation and amortization and change in net working capital are both consistent at 3% annually, effective tax rate is 21%, and the discount rate is 5.45%. The computation was made in the view of an optimistic scenario.
Comparable analysis, on the other hand, is the use of standardized valuation measures and assets which are relative to the asset being valued (Damodaran, 2013). In involves making casual inferences about how the variables on our collected data are related. After using comparative analysis, I have determined that Smucker, Kellogg, and General Mills are comparable, as the EBITDA, EV, and EBIT multiples of these are of the same ranges and values. Based on the precedent transaction methodology, I have noted that Nabisco Holdings, Cadbury Plc, and Pillsbury Company are comparables since the benefits of their transactions range from $16 billion to $36 billion.
Although Heinz was not performing too well recently, it has the potential and ability to be great and be one of the top-performing companies, particularly in the food industry. I believe that there will be synergies that can be obtained from this transaction. Heinz is engaged in the production of pre-packed foods, and it has been successful in the retail food industry, particularly in the production of sauces and condiments. Should the merger transpire, they will save many costs, mainly since one of the top contributors to the charges to food and beverage restaurants includes costs incurred for condiments. With this, the earnings may potentially be increased by billions due to lower costs.
In conclusion, the merger was a fair deal for all the stakeholders of the companies involved. This will benefit both of the companies as their joint force will help them expand and compete worldwide. Heinz, which has been very successful in the retail food industry, particularly in the production of sauces and condiments, will surely help the merged companies obtain cash inflows for the years to come. Being a multinational food producer, which has always been competitive in the global marketplace, it has already established its name in the production of pre-packed branded foods. As such, it is already well known by people, so it will not have a hard time attracting customers. On the other hand, 3G and Berkshire are also multinational companies kno...