Few people have £18bn worth of funds to spend. But someone that does is Warren Buffett and a Brazilian firm, who look set to purchase Heinz for this sum. Heinz, known for things like baked beans and ketchup already has an exceptionally strong brand and is cash rich – these are two ingredients which Warren Buffett likes and have undoubtedly played their part in securing what looks to be a tasty deal.
The company’s Board has already approved the deal, but shareholders still need to have their say and have been offered $72.50 per share. 650 million bottles of Heinz ketchup are sold every year and its baked beans, at the least in the UK, are second to none. Products like this have given Heinz its global brand name and have provided the opportunity to shareholders to make significant gains. Its Chairman said:
The Heinz brand is one of the most respected brands in the global food industry and this historic transaction provides tremendous value to Heinz shareolders.
This statement was certainly reciprocated by Warren Buffett when he spoke to CNBC, saying:
It is our kind of company … I’ve sampled it many times … Anytime we see a deal is attractive and it’s our kind of business and we’ve got the money, I’m ready to do.
The deal therefore looks to be profitable to both sides, but is there more to it? An investigation has already been launched by the Securities and Exchange Commission as to whether information about this purchase was leaked early and was used to make money. Insider trading occurs when someone is given information early about a merger such as the one described above. They then use this information, before it is made public, to buy up a company’s stock. It is incredibly difficult to prosecute and huge amounts of money can be made by hedge funds, amongst others. This is certainly one aspect of the deal to keep your eye on.
So, what does the future hold for Warren Buffett and Heinz? Buffett likes to extract extra value from companies he purchases and has in the past split up his businesses to create separate trading companies. However, given his taste for ketchup and his appreciation for strong global brands, it’s unlikely that we’ll see a change to the recipe of any of the well-known products. The following articles consider the takeover and the case of insider trading.
Will Buffet ‘squeeze value’ from Heinz BBC News (15/2/13)
Heinz-Buffett deal: will anyone spill the beans on insider trading? The Guardian, Heidi Moore (15/2/13)
Heinz bought by Warren Buffett’s Berkshire Hathaway for $28bn BBC News (14/2/13)
Traders sued over Heinz share bets Independent, Nikhil Kumar (16/2/13)
Heinz deal brings it back to its roots Financial Times, Alan Rappeport, Dan McCrum and Anoushka Sakoui (14/2/13)
Beanz means Buffet: Heinz purchased in $28bn takeover The Guardian, Dominic Rush (14/2/13)
US SEC sues over Heinz option trading before buyout Reuters (15/2/13)
Warren Buffet and Brazil’s ‘Sage’ Jorge Leman strike £18bn Heinz deal The Telegraph, Richard Blackden (15/2/13)
Questions
- What type of take-over would you class this as?
- Consider the Boston matrix – in which category would you place Heinz when you think about its market share and market growth?
- Why is a company that has a global brand and that is cash rich so tempting?
- Given your answer to question 3, why have other investors not taken an interest in purchasing Heinz?
- If you were a shareholder in Heinz, what factors would you consider when deciding whether or not to vote for the takeover?
- What growth strategy has Heinz used to establish its current position in the global market place?
- What is insider trading? Explain how early information can be used to make money in the case of Heinz.
- Explain how the share price of $72.50 is set. How does the market have a role?