Big Buyout 2013 No.3 ; Heinz by Warren Buffet & 3G Private Equity.

Heinz, a food manufacturing conglomerate is to be bought 50-50 by Berkshire Hathaway and Private Equity company 3G.

Berkshire Hathaway is a holding company owned by Warren Buffet that buys shares in many businesses and  also buys whole business. An insurance business that is owned by Berkshire Hathaway provides cash for many of the investments made by Warren Buffet. This means he has less interest to pay on debt, as he has more direct access to capital than many other similar companies who also aquire shares and businesses. 

Warren Buffet has accused private Equity firms of being "financial engineers who don't love their companies."

The total amount of debt which will be put on Heinz, relative to the total size of the deal is comparitively low compared to other deals involving private equity companies.

However, Heinz will go into an additional $12 billion of debt....... in addition to its current debts !

If you don't know much about the buyout business , it may come as a shock that the banks, adding  $12 billion of debt to this business can be justified, when the company is not necessarily going to look visibly different when this deal is completed. Thus, where this $12 bn is going to be recovered from in order to pay the mortgage is worryingly unclear !

As much of a shock this may be, the debt added as compared to the total value of the deal is only 42% debt as compared to the total deal value. In private equity buyouts,the debt to total deal value ratio is usually in the region of 60% and 80%. You can see other X-Economics posts explaining how banks justify this debt. But the point here is that, Heinz costs are just about to increase substantially as a result of this debt.

Prices of Heinz products are likely to rise. Or the business may cut costs by redundancies or complete closures at the more expensive plants. You should note (It goes without saying really..)also that the debt added is likely to reduce expansion possibilities ! (I mean real expansion- building new plants, not more buyouts!). This is because banks are more likely to lend for existing assets, rather than assets which do not yet exist ! To put another way, they encourage a lack of progress rather than progress in big businesses !

Is this really good business ? Well it clearly isn't. This business with no doubt would be better off continuing as before......But this is providing great business for the bankers providing the debt and other financial businesses including Berkshire Hathaway and 3G Capital. Stuff the rest of us...it seems !

Finally, as proved with a previous buyout of a large company by 3G, Burger King; If you can keep everything intact for a while, you have the option of floatation on those ever enthusiastic stock markets, some time in the future, where you can recover all your costs, make a profit  on the sale and leave the debt with the new share holders..........Who could be you .....if you have a pension fund or similar investment !.... Because in the stock markets....No one is using there own money !