Buffett’s Heinz Sequel May Be His Biggest Deal: Real M&A

Billionaire Warren Buffett
Warren Buffett, chairman of Berkshire Hathaway Inc., discusses Heinz ketchup bottles bearing his likeness as he tours the exhibition floor prior to the Berkshire Hathaway shareholders meeting in Omaha, Nebraska. Photographer: Daniel Acker/Bloomberg

The busiest period for mega-deals in seven years may be an appetizer to Warren Buffett’s biggest takeover yet.

The 83-year-old chairman of Berkshire Hathaway Inc. told shareholders May 3 that he’d welcome another large deal with 3G Capital after teaming up with the buyout firm last year to acquire ketchup maker H.J. Heinz Co. Food companies Kellogg Co., Kraft Foods Group Inc. and General Mills Inc. -- each valued at more than $20 billion before debt and a takeover premium -- may fit the bill for Berkshire and 3G, according to data compiled by Bloomberg based on criteria Buffett has said he looks for when evaluating targets.

Buffett, the world’s third-richest man, said he’s looking for acquisitions to “sop up” the $49 billion of cash his holding company has accumulated, which may mean he’s gearing up for his biggest purchase. Barclays Plc estimates Berkshire could use a combination of cash and debt for a deal of up to $50 billion, which would top its $34.5 billion takeover of Burlington Northern Santa Fe Corp. more than four years ago.

“Berkshire could do a $50 billion deal without sweating,” Jeff Matthews, a Berkshire shareholder and author of books about the company, said in a phone interview. “The size that he’s looking for has gone way up.”

Partnering with 3G gives Omaha, Nebraska-based Berkshire the ability to buy a company that “might not necessarily add to its core energy or railroad businesses, but it would fit with the Heinz deal,” Matthews said. It also means Buffett can pursue “more expensive targets because 3G is very good at buying things and cutting costs.”

Not Alone

As Buffett sets his sights on larger takeover candidates, so are other acquirers. The volume of mergers and acquisitions exceeding $20 billion that have been announced or proposed since November surged to $312 billion, the highest for a six-month period since 2007, data compiled by Bloomberg show.

Berkshire doesn’t pay a dividend, leaving Buffett and his deputies to look for capital-spending opportunities and takeovers. The company’s operations -- which span energy, insurance, manufacturing, transportation and now ketchup -- generated $26.6 billion of cash in the 12 months through March.

Buffett told shareholders at his company’s annual meeting that he and business partner Charles Munger, 90, are focused on acquiring large companies to create “more enduring” value. He also said that Berkshire is “very likely to partner” with 3G on another deal, “perhaps on some things that are very large.”

Buffett’s Type

Buffett didn’t immediately respond to a request for comment sent to an assistant. A representative for New York-based 3G Capital declined to comment on its acquisition plans. 3G founder Jorge Paulo Lemann is known for combining beer makers to form Anheuser-Busch InBev NV, the world’s No. 1 brewer.

Buffett has said over the years that he prefers “simple” businesses that he understands and that have “good” returns on equity with consistent earnings power.

Like Heinz, food companies such as Kellogg, Kraft Foods and General Mills check those boxes, Brian Yarbrough, an analyst covering consumer stocks for Edward Jones & Co. in St. Louis, said in a phone interview.

Representatives for Battle Creek, Michigan-based Kellogg, Northfield, Illinois-based Kraft Foods and General Mills in Minneapolis, said their companies don’t comment on speculation.

Those three are among 50 U.S. companies valued at $15 billion to $50 billion that have a return on equity greater than 10 percent and a price-earnings ratio less than 20, data compiled by Bloomberg show. The list excludes financial services providers, drugmakers and technology companies.

Rice Krispies

Kellogg is particularly attractive because cereal is “one of the more profitable food categories,” Yarbrough said. While General Mills also makes cereal, its more logical suitor is considered to be Nestle SA because the two companies already have a joint venture, he said. Kellogg owns Frosted Flakes, Rice Krispies and Froot Loops. General Mills has Cheerios, Fiber One and Lucky Charms.

Kraft Foods was created in 2012 when Kraft Foods Inc. separated its North American packaged-food operations from its faster-growing snacks business, which is now called Mondelez International Inc. Kraft Foods’ brands include A1 steak sauce, Oscar Mayer hot dogs and Velveeta cheese.

“Kraft actually makes a lot of sense to me because it’s like a Heinz,” Mark Bronzo, a managing member at Nudge Capital LLC in Rye, New York, who helps oversee about $20 million, said in a phone interview. “It pays a big dividend, it’s a generator of cash and now it has become a domestically focused company.”

Prior Stake

Berkshire was previously the largest shareholder in Kraft Foods’ predecessor, when it was led by Irene Rosenfeld. Buffett lowered the stake in 2010 as he opposed the foodmaker’s takeover of Cadbury Plc and the sale of its pizza brands. Rosenfeld now runs Mondelez, and Kraft Foods is run by Tony Vernon.

Today, Kraft Foods shares fell 0.4 percent to $56.06. Kellogg rose 0.5 percent to $65.34 and General Mills fell 0.3 percent to $52.86.

Buffett has “had a lot of success” with trains and may keep his focus on industrial companies, Bronzo said. Burlington Northern accounted for about 12 percent of Berkshire’s $182 billion of revenue last year. The acquisition of the railroad is still Buffett’s largest.

He may continue to wager on the energy industry as well, though there aren’t “a lot of bargains,” said Brian Barish, who helps oversee about $10 billion as president and chief investment officer of Cambiar Investors LLC in Denver.

Thinking Big

A year ago, Berkshire’s utilities unit offered to buy NV Energy Inc. for about $10 billion, including net debt. Last week, it announced a $2.9 billion acquisition of SNC-Lavalin Group Inc.’s AltaLink, the operator of electric transmission lines in western Canada.

It “seems to me Mr. Buffett has an issue with size -- Berkshire is gigantic and deals of less than $5 billion are just immaterial relative to the company,” Barish said. “One has to think big.”

Matthews, who wrote the book “Warren Buffett’s Successor: Who It Is and Why It Matters,” cautions that now isn’t the best time to be making big acquisitions. Amid the takeover frenzy, the Standard & Poor’s 500 Index hit a record last month.

“It’s the most dangerous point in the acquisition cycle,” he said. But “Buffett will never do something stupid. If something comes along that makes sense, he’ll do it.”

Buffett has said that he always wants to have $20 billion of cash on hand. Berkshire, with a market value of $312 billion as of yesterday, has the capacity to complete up to a $50 billion deal funded by a mixture of excess cash, equity investments converted to cash, and debt, according to Jay Gelb, a New York-based analyst at Barclays.

“The most important thing for us as Berkshire shareholders is for Berkshire to continue to be able to deploy capital,” Tom Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner, said in a phone interview. Berkshire’s next large deal is “going to be entirely opportunistic. I would think that they are absolutely ready to go if something came along.”

List of large companies that meet Buffett’s criteria, sorted

Aetna Inc.
Baxter International Inc.
Becton Dickinson & Co.
CBS Corp.
Cigna Corp.
CSX Corp.
Cummins Inc.
Deere & Co.
Dollar General Corp.
Eaton Corp.
Emerson Electric Co.
Freeport-McMoRan Copper & Gold Inc.
Gap Inc.
General Dynamics Corp.
General Mills Inc.
Hess Corp.
Humana Inc.
International Paper Co.
Kellogg Co.
Kimberly-Clark Corp.
Kraft Foods Group Inc.
Kroger Co.
LyondellBasell Industries NV
Macy’s Inc.
Marathon Petroleum Corp.
National Oilwell Varco Inc.
NextEra Energy Inc.
Norfolk Southern Corp.
Northrop Grumman Corp.
Omnicom Group Inc.
Paccar Inc.
Parker Hannifin Corp.
Phillips 66
Plains All American Pipeline LP
Public Service Enterprise Group Inc.
Raytheon Co.
Reynolds American Inc.
Southern Copper Corp.
Southwest Airlines Co.
Spectra Energy Corp.
St. Jude Medical Inc.
Stryker Corp.
Sysco Corp.
Target Corp.
United Continental Holdings Inc.
Valero Energy Corp.
Viacom Inc.
WellPoint Inc.
Xcel Energy Inc.
Zimmer Holdings Inc.
Before it's here, it's on the Bloomberg Terminal. LEARN MORE