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Homework #4 (Heinz Valuation): M&A, Spring 2021 Due before class on May 4 This is a group assignment. Please write the names of your group members when you submit your assignment. The assignment is due before next Tuesday’s class. This assignment is to calculate a reasonable bid-price for Heinz shares based upon comparable companies and comparable precedent transactions. __________________________________________ (1) Exhibit 4 in the Heinz case-study shows a list of 12 comparable companies. Select a shorter list of 5 companies that in your view is the list of the “best” comparable companies. Describe your reasoning for your selection. Each group may have a different list of 5 “best” comparable companies. (It will be unusual if several groups have the same list) Based on your list, calculate the Median EV/EBITDA multiple and calculate a share price for Heinz based on this Median value, and suggest a price that the PE group should bid and the implied premium. (2) Exhibit 5 in the Heinz case-study shows a list of 25 precedent acquisitions. Select a shorter list of 5 transactions that in your view is the list of the “best” comparable transactions. Describe your reasoning for your selection. Each group may have a different list. Based on your list, calculate the Median EV/EBITDA multiple and calculate a share price for Heinz based on this Median value, and suggest a price that the PE group should bid. H. J. Heinz M&A REVISED APRIL 25, 2019 DAVID P. STOWELL AND NICHOLAS KAWAR ’14 KEL848 H. J. Heinz M&A In December 2012 Jorge Paulo Lemann, a co-founder and partner at investment firm 3G Capital, proposed to Warren Buffett that 3G and Berkshire Hathaway acquire H. J. Heinz Company. After negotiating the purchase price, Heinz agreed to continue discussing the acquisition. Although the food industry was mature, 3G and Berkshire Hathaway saw opportunities for Heinz both in expanding into emerging markets and realizing operational efficiencies in production. Investment bankers representing both sides agreed that the acquisition was valued fairly. But was this, in fact, a fair deal? What could be the future consequences for shareholders, management, employees, and citizens of Pittsburgh, where Heinz had long been headquartered? Also, what was the role of activist investors in bringing Heinz to this deal stage? Proxy Fight Six years prior to the acquisition talks, in 2006, the market overall was booming: companies signaled record profits; merger and acquisition (M&A) activity was strong; and markets were showing signs of recovery from the dot-com crash of the early 2000s. The story was the opposite for Heinz: quarterly losses piled up and shareholders demanded immediate changes. Pressure for improvement was fierce, especially from Nelson Peltz, the outspoken activist investor who had recently acquired a 5.4 percent stake in Heinz through his investment fund, Trian Fund Management L.P. Peltz demanded that the company either be sold, or shed non-core assets, aggressively repurchase stock, and trim the fat that had built up under the watch of William Johnson, Heinz’s CEO. Peltz demanded that he receive five board seats to add real management oversight to the weakening company. In June 2006 Heinz announced a massive restructuring that eliminated more than 2,700 employees, closed fifteen factories, and initiated a $1 billion share buy- back. Heinz’s effort to retain control of the company by embarking on this turnaround plan was only partially successful. Ultimately, Peltz was able to secure two board seats on the twelve-person board. The foundation had been paved for a potential sale of the company down the road. Market Conditions Following the 2008–2009 financial crisis that devastated the worldwide economy, the U.S. economy revived slowly. The GDP growth rate oscillated around 2 percent, and many economists predicted a slight GDP rebound to 3 percent. As consumer confidence grew, there was moderate growth in consumer spending and an increase in inventory. Though dissenting opinions existed, ©2014, 2019 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor David P. Stowell and Nicholas Kawar ’14. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing. For the exclusive use of C. Richardson, 2021. This document is authorized for use only by Courtney Richardson in Mergers and Acquisitions 2021 Spring taught by SRIS CHATTERJEE, Fordham University from Mar 2021 to May 2021. mailto:
[email protected] H. J. HEINZ M&A KEL848 many economists and economic indicators pointed to the fact that the United States was on the road to recovery. Within the food and beverage industry, many companies began to see a rebound in consumer purchasing. Some executives saw growth opportunities by expanding their customer base to new geographic markets (including China, Russia, India, and the Latin America region), while others saw growth opportunities by leveraging economies of scale across fixed production lines. M&A activity increased from lows in 2008, as investors continued to pressure management to divest non- core product lines in search of more efficient businesses and to expand growth and margins through acquisitions. The Acquisition Jorge Paulo Lemann and Warren Buffett, who had known each other for years, jointly decided that the Heinz turnaround that was started by Peltz had been successful and there was significant potential for continued global growth. 3G informed CEO Johnson that it and Berkshire Hathaway were interested in jointly acquiring Heinz. Johnson then presented the investors’ offer of $70.00 per share of outstanding common stock to the Heinz board. At a meeting on January 15, 2013, the board appointed a transaction committee and voted to retain Centerview and Bank of America Merrill Lynch as advisors. Heinz’s board and advisors discussed the trends that were negatively impacting Heinz, including low international GDP growth. They also discussed alternatives to a sale, including remaining a standalone company or pursuing acquisition by another company in the food and beverage industry. After updating its strategic plan and financial projections, Heinz informed 3G that without better financial terms it would not continue to discuss the possibility of an acquisition. Two days later, 3G and Berkshire Hathaway returned with a revised proposal of $72.50 per share, for a total transaction value of $28 billion (including Heinz’s outstanding debt). A week after the new proposal, Heinz agreed to continue discussing the acquisition. Following a forty-day “go-shop” period1 (permitting Heinz some time to look for other investors) Heinz, 3G, and Berkshire Hathaway agreed to sign the deal on February 13, 2013. On that day, Bank of America Merrill Lynch and Centerview presented to the Heinz board their opinions that the acquirers’ offer was fair from a financial perspective. The transaction committee of the board also provided its approval of the acquisition after receiving a fairness opinion from Moelis & Company, allowing execution of a merger agreement and a press release announcing the transaction. 1 A go-shop is a provision in a merger that allows a target to solicit interest from potential buyers of the company for a limited period of time (usually less than two months) after signing a definitive agreement with an initial buyer. The right to solicit includes the ability to exchange confidential information about the target with a potential buyer based on the completion of a confidentiality agreement. If a better offer emerges from the go-shop process, the target company board is able to exercise a “fiduciary out” and terminate the merger agreement with the initial buyer. This may be subject to payment of a break-up fee. KELLOGG SCHOOL OF MANAGEMENT 2 For the exclusive use of C. Richardson, 2021. This document is authorized for use only by Courtney Richardson in Mergers and Acquisitions 2021 Spring taught by SRIS CHATTERJEE, Fordham University from Mar 2021 to May 2021. KEL848 H. J. HEINZ M&A Key Dates2 12/12/12 Jorge Paulo Lemann, partner at 3G Capital, proposes to Warren Buffet that Berkshire Hathaway and 3G acquire Heinz. Buffet responds positively. 12/18/12 William Johnson, CEO of Heinz, meets with Lemann and Alexandre Behring, a managing partner at 3G. They discuss the food and beverage industry without proposing an acquisition. 1/10/13 Behring tells Johnson that 3G and Berkshire Hathaway are interested in jointly acquiring Heinz. Johnson responds that he will inform the Heinz board if Behring will provide a written proposal, but that Heinz is not for sale. 1/14/13 3G and Berkshire Hathaway provide a non-binding proposal in which they offer to acquire Heinz at $70.00 per share for outstanding common stock. 1/15/13 Heinz board meets to discuss the proposed acquisition, then appoints a transaction committee and votes to retain advisors (Centerview and Bank of America Merrill Lynch). 1/20/13 Heinz updates its financial projections and strategic plan. 1/22/13 Heinz informs 3G that it will not advance discussions without improved financial terms. 1/24/13 3G and Berkshire Hathaway provide a revised non-binding proposal for $72.50 in cash per outstanding common share. 1/30/13 Heinz board decides the proposal is an attractive option and allows continued discussions. 2/1/13 3G and Berkshire Hathaway send a proposed term sheet to Centerview. 2/7/13 New draft term sheet is provided that includes a forty-day “go-shop” period. 2/8/13 All parties agree to sign by February 13. 2/13/13 Moelis & Company presents a fairness opinion to the transaction committee, which then recommends to the Heinz board that the company be sold. The other advisors present fairness opinions and the board approves the transaction. 2/14/13 Heinz, 3G, and Berkshire Hathaway issue a press release announcing the transaction. 3/30/13 Heinz announces that shareholders approved the acquisition. 2 Heinz Proxy Statement, http://www.sec.gov/Archives/edgar/data/46640/000119312513089866/d491866dprem14a.htm. KELLOGG SCHOOL