Investment Firm 3G Capital Eyes Next Targets
With New $5 Billion From Investors, Brazil’s Buyout Kings Start to Shop Around
Brazilian investment firm 3G Capital Partners LP has used relentless ambition and big-name connections to become one of the world’s biggest acquirers of companies, including H.J. Heinz Co. and Tim Hortons Inc.
Now the firm is setting its sights on potential new targets that could give it control of even more of the world’s best-known consumer brands. In the past several weeks, investors have pledged about $5 billion to a new takeover fund being formed by 3G, according to people familiar with the matter.
3G hasn’t publicly disclosed the amount raised or what it plans to do with the money, but 3G usually seeks only what it needs in equity for individual deals, using borrowed money to at least quadruple the firm’s buying power.
In a sign of the investment firm’s aspirations, executives are discussing the possibility of trying to buy a food or beverage company such as Campbell Soup Co. , worth about $14 billion, or even PepsiCo Inc., which has a stock-market value of $140 billion, say people familiar with the situation.
People close to 3G, led by former professional tennis player Jorge Paulo Lemann, caution that no decisions have been made. 3G often studies targets for years before making a move.
And because a PepsiCo deal could be four times as large as Heinz and Tim Hortons combined, 3G might pursue only pieces of PepsiCo or try to join forces with Anheuser-Busch InBev NV, these people said. Mr. Lemann, his two partners and a group of Belgian families own a controlling stake in the beer maker. PepsiCo, Campbell and AB InBev declined to comment.
Some analysts have speculated that 3G also might be interested in Kellogg Co. and Kraft Foods Group Inc., each with more than $20 billion in stock-market value. Kraft’s board of directors replaced the packaged-food giant’s chief executive last month, signaling impatience with a turnaround there, while Kellogg cut the size of payouts to some executives if the cereal maker is sold.
Some analysts saw Kellogg’s move as positioning for a possible sale. A spokeswoman says the change was made “to better align with evolving market practices.” A Kraft spokeswoman declined to comment.
The swirling interest in 3G’s next big deal is a sign of how far the firm has come in the past decade—and especially during the past few years. The purchases of Heinz and Tim Hortons for a combined $36 billion rank as the second- and fifth-largest takeovers in the consumer and retail sectors since the start of 2013, according to Dealogic.
“These guys have global ambitions,” says Warren Buffett , whose Berkshire Hathaway Inc. teamed up with 3G to buy the ketchup maker. Berkshire Hathaway also provided $3 billion in financing last year for the Tim Hortons purchase by Burger King Worldwide Inc. 3G owns a 51% stake in the combined company, Restaurant Brands International Inc.
Mr. Buffett says he would work with 3G on another friendly takeover if the opportunity looks right.
3G is considered a private-equity firm but doesn’t raise money the same way most of them do. Rather than getting a huge pot of money from a large number of investors, the 75-year-old Mr. Lemann and his partners, Carlos Alberto “Beto” Sicupira and Marcel Herrmann Telles, turn to roughly three dozen of the world’s wealthiest families and individuals.
In addition to Mr. Buffett, recent investors include hedge-fund manager William Ackman, members of Colombia’s Santo Domingo family, seven-time Wimbledon men’s champion Roger Federer of Switzerland and JAB Holdings, which manages assets for Germany’s Reimann family, according to people familiar with 3G’s operations.
An investor meeting at Burger King’s headquarters in Miami after 3G took the fast-food chain private in a $3.3 billion buyout had more than 40 people, including executives from the two companies, says a person who was there. Many of the investors were people “you wouldn’t have heard of. Many of them don’t speak English,” this person adds. The group included a slice of Latin America’s wealthiest businessmen, heirs and heiresses.
Mr. Ackman, who made his reputation and fortune by agitating companies through his Pershing Square Capital Management LP hedge-fund firm, invests his personal money with 3G, where he says he is happy to keep his mouth shut.
“This is a management team that does not require shareholder activists,” Mr. Ackman says. Pershing Square owns 19% of Restaurant Brands.
Messrs. Buffett and Lemann met in 1998 as directors at Gillette Co. before the razor maker was acquired by Procter & Gamble Co. The two men stay in touch by email, occasionally have dinner in Mr. Buffett’s hometown of Omaha, Neb., and spend much of their time talking about subjects other than deals and investments, such as tennis.
“I’ve always liked him, and the more we do together, the more I like him,” Mr. Buffett, 84, says about Mr. Lemann, who he calls “Georgie.”
The Brazilian investment firm, with offices in Rio de Janeiro and New York, also has a reputation for aggressive cost-cutting at companies it acquires. Job cuts and tax wizardry boost profits and threaten rivals. Using “zero-cost budgeting,” each division of a company must justify its costs from scratch each year, not simply nudge the prior year’s budget higher.
The strategy is similar to an approach used by Mr. Lemann after he took over Brazilian brokerage firm Garantia in the 1970s and then built it into one of the country’s biggest investment banks. Credit Suisse Group AG bought Garantia for $675 million in 1998.
Mr. Lemann, who graduated from Harvard University, instituted a merit-based culture where employees could expect to advance if they excelled—but would be fired if they didn’t. He closely studied companies he admired for their operational efficiency, including Wal-Mart Stores Inc. and General Electric Co. , according to an unofficial biography about Mr. Lemann and his partners called “Dream Big.”
The three men still go spearfishing together regularly and own homes in the same São Paulo neighborhood. Their combined net worth is estimated at more than $40 billion.
They formed 3G in 2004, partly to test business principles developed at Garantia. Few investors knew much about the men behind 3G until Mr. Lemann helped engineer Brazilian-Belgian brewer InBev’s takeover of Budweiser-maker Anheuser-Busch Co. in 2008 for $52 billion. Anheuser-Busch InBev now sells nearly one-fifth of the world’s beer.
“Jorge Paulo plays at the end of the tennis court, with extreme patience. He waits to see the weakest side of his rival,” says Luiz Cezar Fernandes, a former partner of Mr. Lemann’s at Garantia. “He doesn’t improvise.”
At Burger King, which 3G bought in 2010, franchisees have complained about “field coaches” from the investment firm who prod franchisees about everything from cost-cutting tricks to cooking techniques. The company also has curbed small expenses such as color photocopies.
Under 3G, Burger King has shifted more profits out of the U.S. and into lower-tax countries. While 57% of the company’s revenue from 2011 to 2013 came from the U.S., just 21% of its pretax income did. Burger King’s effective tax rate averaged 26% in the same period, lower than McDonald’s Corp. and Starbucks Corp.
Tax experts say Burger King likely allocated overhead costs such as technology and personnel that would typically be spread across all of its financial statements to the U.S. The move is legal and can help businesses avoid the U.S.’s higher tax rate. Burger King wouldn’t comment.
After buying Heinz, already considered one of the food industry’s most efficient operators, 3G eliminated more than 1,000 jobs and closed factories in South Carolina and Canada. Heinz had about 32,000 employees at the time of the takeover.
The moves have led to big returns for 3G and its investors. Those who were part of the firm’s Burger King buyout have gained at least four times their original investment, people familiar with the matter say.
According to an estimate by Trian Fund Management LP, an investment firm that pushed Heinz before the takeover to slim down, the ketchup maker cut $700 million in costs in the year ended June 30 under 3G’s ownership and improved profit margins to 25% from 18%. Berkshire Hathaway owns half of Heinz but has left oversight of the business to 3G.
Before being replaced by Kraft, CEO Tony Vernon told analysts and investors that the maker of Jell-O and Cool Whip needed to do more to improve margins “with the likes of 3G now in our space.”
Analysts expect the takeover of doughnut and coffee chain Tim Hortons of Canada to result in substantial savings because Canada’s tax system is generally more favorable to multinational companies than the U.S.
Messrs. Lemann, Sicupira and Telles aren’t well-known to Brazilians outside the finance industry. In 2012, the collapse of Eike Batista’s oil and infrastructure empire made Mr. Lemann the richest man in Brazil, but he told investors he dreaded the title because it would attract more media scrutiny.
He rarely speaks to reporters and hasn’t lived full-time in Brazil since 1999, following an unsuccessful attempt by someone to kidnap three of his six children. He splits his time between Brazil, the U.S. and Switzerland, where he has citizenship.
3G attracts “an elite club” of rich families and individuals because the firm’s executives are seen as “one of their own,” according to Kevin Martins da Silva, a partner at investment bank Three Ocean Partners who works with wealthy families in Latin America.
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Even though Mr. Lemann and his partners are rich enough that they could buy big companies on their own, about half the cash in 3G’s deals comes from outside investors, partly to build future “deal flow” through their investors’ contacts, people familiar with the matter say. In addition, 3G sometimes asks investors to become directors at companies acquired by the firm.
“I have had partners all my life and it has helped me a great deal,” Mr. Lemann said in “How to Make a Company Succeed in an Uncertain Country,” a book published in Brazil in 2005. “The three of us have been able to do much more than we could have done separately,” he said, referring to Mr. Telles, 64, and Mr. Sicupira, 66, who have known each other for decades.
Investors say Mr. Lemann comes across as patient and thoughtful. He inspires loyalty and silence among investors, who often refuse to discuss 3G even privately out of worries they might be evicted from the investment group.
3G likes to invest for much longer than the five- to seven-year time horizon typical of most private-equity firms. Investors say the approach is similar to how merchant banks in Europe used to invest capital alongside wealthy families, whose top goal often is creating wealth for younger generations, not short-term profits.
Investors often get just days to write their check, sometimes for as little as $10 million, say people close to 3G, and officials seldom give any clues about possible acquisition targets.
Some people close to 3G say it got more secretive after an insider-trading scandal related to Burger King. In 2012, the Securities and Exchange Commission alleged that a former broker at a Wells Fargo & Co. unit learned about the pending sale from a brokerage customer who had invested in a 3G fund.
The broker, a Brazilian citizen, allegedly bought Burger King shares before the deal was announced. 3G wasn’t accused of wrongdoing. The broker was ordered to pay $5.6 million but fled the U.S. Wells Fargo paid a $5 million fine and admitted failing to maintain adequate controls to prevent an employee from insider trading based on nonpublic information.
Investors aren’t fazed by 3G’s secrecy. One investor in the 2013 takeover of Heinz got a call from Alexandre Behring, who runs 3G on a day-to-day basis and is responsible for promoting the firm to American investors.
Mr. Behring didn’t tell the investor the name of the target, but the person signed up without even reading confidential documents offered to potential investors, according to someone familiar with the matter.
“Their thing is not investing the money for a fee,” a longtime investor says. “They choose to invest with people they know and [who] know what they do.”
Mr. Buffett said no when Mr. Lemann asked him to invest with 3G in the Burger King acquisition, but Mr. Buffett kept an eye on what 3G was doing.
When Mr. Lemann called last February to see if Mr. Buffett wanted to invest in the Tim Hortons deal, Mr. Buffett says he didn’t hesitate before saying yes.
The two men have become so close that Mr. Buffett traveled in August to Harvard for a party to celebrate Mr. Lemann’s 75th birthday.
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