A case in point is the $28 billion buyout of the H.J. Heinz Company by Berkshire Hathaway and a partner, the investment firm 3G Capital. The deal, announced in February, is expected to be completed by the end of the summer.
Heinz had three investment bankers to advise it: Centerview Partners, Bank of America Merrill Lynch and Moelis & Company. Going through Heinz's disclosure of the bankers' analysis, it is pretty clear that Berkshire and 3G did not pay top dollar.
Berkshire Hathaway and 3G are paying a 19.1 percent premium over the closing price of Heinz shares the day before the acquisition was announced. This is below the average premium of 31 percent in the industry that Heinz's own investment banking firm Centerview Partners used to determine the fairness of the transaction.
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The two buyers are also paying a multiple of 11.9 times the last 12 months of Heinz's earnings before interest, taxes, depreciation and amortization, or Ebitda. This compares with a range of 8.8 to 15.6 times, the ratio paid in comparable acquisitions of food companies disclosed by Bank of America Merrill Lynch.
The bottom line is that the bankers' disclosure shows that the amount that 3G and Berkshire paid was below that of many other deals in the food industry.
The two buyers did not pay top dollar, but they did pay a fair price for Heinz and are certainly not paying as low a multiple as in other deals, like Kohlberg Kravis Roberts's $5.3 billion acquisition of Del Monte Foods in 2010, which had a multiple of almost nine times.
Where it gets really tasty, though, are the terms that Berkshire negotiated for its own investment. In addition to putting up half the equity with 3G, or $4.12 billion each, Berkshire made an $8 billion investment for preferred stock.
And boy, is that preferred stock investment on good terms. It pays 9 percent interest, and has a redemption feature at "at a significant premium price," according to Mr. Buffett.
This gives real downside protection to Berkshire for the investment. Not only that, but in exchange for the preferred investment, Berkshire was also issued warrants to buy 5 percent of Heinz for a "nominal" price, or in other words, pennies.
Mr. Buffett is getting 55 percent of Heinz plus an interest payment of $700 million a year. This is an extraordinarily good deal.
To see why, you need only to look at the terms of the rest of the financing. Heinz is taking on $14.1 billion in additional debt to help finance this deal. The debt takes several forms, and one part of it is $3.1 billion of high-yield notes at a 4.25 percent interest rate.
This yield is extraordinarily low, given that high-yield debt is ordinarily in the double digits. But this is no ordinary time, and despite the low yield, the issue was more than three times oversubscribed.
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In this light, the relatively high 9 percent payment on the preferred stock investment plus its bonus features seem out of whack. 3G could have found cheaper financing by a few percentage points lower than it will pay on the preferred investment, even though Heinz will be laden with debt. The higher rate on the preferred investment will translate into a couple hundred million dollars more each year for Berkshire Hathaway.
As for Berkshire, it just sold five-year debt yielding a measly 1.3 percent. Basically, Berkshire's financing costs for its preferred investment are most likely around 1 percent, meaning that it is earning in the double digits on the preferred investment. Then there is the upside on the $4 billion equity investment.
The Heinz deal aptly illustrates the huge issue looming for Berkshire shareholders. Simply put, Mr. Buffett negotiated a deal almost no one else on the planet could have received.