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Buffett Search for Heinz Sequel Puts Kellogg in Sights: Real M&A
2014-05-05 22:59:13.600 GMT
(For a Real M&A column news alert: {SALT REALMNA <GO>}.)
By Tara Lachapelle and Will Robinson
May 6 (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.
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.”
Industrials, Power
Still, 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.
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.”
Danger Point
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.”
For Related News and Information:
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*T
List of large companies that meet Buffett’s criteria, sorted
alphabetically:
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.
*T
--With assistance from Noah Buhayar in New York.
To contact the reporters on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net;
Will Robinson in New York at +1-212-617-5327 or
wrobinson11@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Whitney Kisling