How the Goose and the Owl got the sauce

American billionaire Warren Buffet has had his eye on Heinz for years, write Michael de la Merced and Andrew Ross Sorkin.

American billionaire Warren Buffet has had his eye on Heinz for years, write Michael de la Merced and Andrew Ross Sorkin.

Just days ago, the fate of a 144-year-old American icon was being hashed out in a Pittsburgh conference room as executives spoke by phone to representatives of two global billionaires who went by the code names "Owl" and "Goose".

Owl was Warren Buffett, chief executive of Berkshire Hathaway and one of the world's richest men.

Goose was Jorge Paulo Lemann, who became one of Brazil's wealthiest financiers with 3G Capital. What emerged from the talks was a $US23 billion ($22 billion) takeover of H.J. Heinz, the maker of the famous tomato sauce and baked beans.

The announcement of the deal and the involvement of Buffett served as confirmation that deal-making spirits have revived in corporate America.

Yet the deal also signals the rising power of investors from once-emerging markets such as Brazil. Armed with strong balance sheets and a growing domestic economy, Brazilian entities have emerged as prominent buyers of US companies. 3G bought control of Burger King two years ago, leading an effort to revive the fortunes of the chain.

In some ways, Heinz fits Buffett's playbook almost to a T. Its global brand recognition approaches that of Coca-Cola and IBM, two companies in which he owns big stakes, and its financial performance is sound.

Born from Henry Heinz's horseradish business, Heinz has become one of the best-recognised food companies in the world, with its bottles of deep-red tomato sauce sitting on millions of kitchen tables.

For the year ended October 28, the company reported $US11.6 billion in revenue and $US1 billion in profit. It generates a majority of its sales in Europe, but its Asian markets are growing quickly.

"It is our kind of company," Buffett told business news channel CNBC. But Berkshire and 3G are paying a healthy price for Heinz. Under the terms of the deal, they will pay $US72.50 a share, 20 per cent higher than the stock's closing price on Wednesday and 19 per cent above its record high. Including debt, the deal is worth $US28 billion.

The deal deviates from Buffett's playbook in several ways. For example, the day-to-day operations of Heinz will be in the hands of 3G. "Heinz will be 3G's baby," Buffett said.

Also, Berkshire is splitting ownership of Heinz 50-50 with 3G, with each company putting in about $US4 billion in cash. Buffett will pay an additional $US8 billion to receive preferred shares, which will pay him a hefty annual dividend of about 9 per cent. The rest of the deal will be financed with debt.

The transaction more closely resembles a leveraged buyout, a type of deal that Buffett has criticised in the past.

But he and Lemann insist they intend to hold Heinz for the long term, whereas in a private equity deal, the buyers inevitably seek to profit by selling their acquisition. Buffett said he regarded the food company as a trophy asset, and would love to buy more control.

"We may increase our ownership if any members of the 3G Group ultimately want to sell out later," he said.

Buffett, 82, says he has studied Heinz as a potential takeover target for years and has heard tales of the company from one of its former chief executives, Anthony O'Reilly, at the house of former Washington Post publisher Katharine Graham.

Still, he didn't breathe a word of his interest to outsiders and never visited Heinz at its corporate headquarters in Pittsburgh.

He did not make the first move. The roots of this week's deal lie with 3G, whose principal backer is Lemann, a former Brazilian tennis champion who has since become one of the country's wealthiest men.

The two men have been friends for decades, having served on the board of Gillette, and both are big investors in the brewer Anheuser-Busch InBev. At a corporate retreat for the brewer's executives in December, Lemann approached Buffett with the idea of taking Heinz private and quickly got his support.

Last month, Lemann formally approached Heinz's chief executive, William Johnson, with a proposal to buy Heinz, and work began in earnest two weeks ago.

Maintaining Heinz's ties to Pittsburgh was important to Johnson, and the buyers assured him the company's headquarters would remain there.

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