Peltz Helped Spur Heinz Turnaround Setting Stage for Bid

Nelson Peltz may warrant thanks from H.J. Heinz Co. stakeholders after Berkshire Hathaway Inc. and 3G Capital’s offer to buy the ketchup maker for about $23 billion, even though the billionaire hedge-fund manager won’t share much in the reward.

Trian Fund Management LP, the New York-based money manager run by Peltz and his partners Peter May and Ed Garden, disclosed taking a 5.4 percent stake in Heinz in April 2006 and then waged a six-month proxy fight to win five seats on the food company’s board. Heinz management sought to keep Trian’s nominees off the board and resisted Peltz’s turnaround plan that called on the company to cut costs and sell assets.

William Johnson, Heinz’s chief executive officer, eventually executed many of Peltz’s suggestions, according to John Sini, a portfolio manager at Douglas C. Lane & Associates Inc. in New York. While Trian will miss out on the 20 percent premium that Berkshire and 3G are paying for Heinz shares after selling off most of its stake, it was Peltz and his partners who got the company to focus on shareholder returns as well as its top brands, Sini said in a telephone interview.

“Management did a great job executing the turnaround, but Peltz was the catalyst for a lot of the change,” said Sini, whose firm oversees about $2.5 billion, primarily for wealthy individuals, and held Heinz shares at the time Trian took its stake. “We are looking at this price now and saying, ‘Thank you, thank you, thank you.’”

20% Premium

Warren Buffett’s Berkshire Hathaway and Jorge Paulo Lemann’s 3G Capital agreed to buy the Pittsburgh-based company for $72.50 a share, Heinz said today. The transaction is valued at about $28 billion, including the assumption of debt. Heinz shares jumped almost 20 percent from their closing price yesterday of $60.48 each.

Anne Tarbell, Trian’s spokeswoman, didn’t immediately return a call requesting comment.

Trian acquired 18.2 million Heinz shares for $673 million, the equivalent of $36.89 a share, according to a filing with the U.S. Securities and Exchange Commission in April 2006. That included 12.86 million shares held by the Trian funds and 5.38 million shares purchased on behalf of funds run by Sandell Asset Management Corp., also based in New York.

‘Sharper’ Focus

Peltz and his partners said in the 2006 filing they “see opportunities to create value” at Heinz through “sharper strategic focus, better operational execution and more efficient uses of capital.” Trian said it was notified on April 6 that Heinz had rejected a request for board representation.

The next month, Trian issued a 21-page report called “Results Speak Louder than Words: A Plan to Enhance Value at Heinz” that said the company’s stock returns have “almost uniformly underperformed” the broader market and other consumer packaged-food companies since its management team took over in April 1998. Heinz shares had fallen almost 11 percent in the previous eight years, Trian said, while an index of large-capitalization food companies such as Campbell Soup Co. and Hershey Co. had increased more than 26 percent.

Trian, citing “ill-fated” divestitures and acquisitions, “failed” corporate restructurings and “poor capital-allocation decisions,” called on Heinz to take immediate measures to reduce annual costs by at least $575 million. It also urged Heinz to increase share repurchases, target higher dividend payments and redirect payments and allowances provided to retailers into consumer advertising and new product innovation.

Company’s Plan

Heinz in June 2006 said it would reduce spending by $355 million, raise its dividend, and buy back $1 billion of shares over the next two years. The company simultaneously sought to thwart Peltz’s proxy fight to gain board seats, telling investors that the billionaire had previously been named in shareholder lawsuits alleging self-dealing.

Peltz and fellow dissident investor Michael Weinstein, the former chief of Snapple Beverage Corp., gained board seats that September, though the remainder of Trian’s slate of candidates were denied directorships. Heinz shares have since provided an average annual return of about 9.9 percent through January, compared with 4 percent for the Standard & Poor’s 500 Index.

“The kudos go to Bill Johnson, go to the management team, go to the board in general,” Peltz said in an interview today on CNBC. Johnson and other Heinz managers “executed terrifically” on the strategic plan he put forward in 2006, and “the result is a $72.50 all-cash offer.”

Stable Investment

Peltz got the Heinz board to start thinking more about shareholder value “and for that we have to thank him,” said Michael Crofton, the president and CEO of Philadelphia Trust Co., which has been holding Heinz shares since at least 2008. At the same time, much of the company’s subsequent success stemmed from the popularity of relatively stable food companies with large dividend yields during a period of high market volatility and low interest rates.

“In the risk-off trade that was on until a year-and-a-half ago,” food companies “were great places to hide,” Crofton said. Heinz’s management, he said, also did a good job of focusing “on their core brands and building brand identity.”

The Trian funds have sold or distributed most of their Heinz stake, leaving the firm with 106,500 shares as of Sept. 30, according to data compiled by Bloomberg.

Client Distributions

Peltz said today on CNBC that Trian had “probably” sold its Heinz shares “in the high 50s,” while regulatory filings show the prices were lower. Trian distributed about 3 million Heinz shares on Feb. 29, 2008, to clients who had recently gained the right to withdraw their capital, according to a regulatory filing. Heinz shares traded at about $44 each at the time of the distribution, which left Trian holding about 10 million shares.

The firm made several subsequent distributions to other clients, according to filings, and, between January 2009 and last July, sold some 7.87 million shares for a total of about $356.7 million. That works out to an average of $45.33 a share.

“Peltz was out at $50,” said James Cullen, the CEO of Schafer Cullen Capital Management, a $14-billion investment adviser based in New York that holds Heinz shares. “A lot of the activists tend to be more short-term oriented.”

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