In 2013, the H.J. Heinz Corp. was considering an acquisition offer from Warren Buffett’s Berkshire Hathaway and 3G, a Brazilian private equity firm. Your valuation analysis will help Heinz negotiate for a fair price from its prospective acquirors.
H. J. Heinz Company was incorporated in Pennsylvania on July 27, 1900. In 1905, it succeeded to the business of a partnership operating under the same name which had developed from a food business founded in 1869 in Sharpsburg, Pennsylvania by Henry J. Heinz. H. J. Heinz Company and its subsidiaries (collectively, the “Company”) manufacture and market an extensive line of food products throughout the world. The Company’s principal products include ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other food products.
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The company’s earnings were quite diversified geographically. About 60% of its sales came from markets outside the U.S. Heinz had been able to successfully adapt to differences in consumer tastes across countries. Emerging economies, such as Brazil, Russia, India, and China were growing at rates much faster than economies in North America and Europe.
The Company manufactures (and contracts for the manufacture of) its products from a wide variety of commoditized raw food materials. Pre-season contracts are made with farmers for certain raw materials such as a portion of the Company’s requirements of tomatoes, cucumbers, potatoes, onions and some other fruits and vegetables. Ingredients, such as dairy products, meat,
sugar and other sweeteners, including high fructose corn syrup, spices, flour and fruits and vegetables, are purchased from approved suppliers.
Competitors included large, well-known companies with diversified food and beverage brands, including Nestle, Unilever, Campbell, Kraft, and General Mills. All of these companies fought for market share through pricing and new product development, but none of them offered an identical set of products as Heinz’s offerings. Major customers were large retailers; Wal-Mart alone comprised 10% of the company’s sales. One source of risk is that retailers were continually developing private label brands that competed with Kraft brands through discounted pricing.
Competition in developing markets was more fragmented than in the U.S., with many smaller players, and Heinz had a growing presence in these markets. Though only about 10% of its total revenue, sales in developing economies more than doubled in 2012 and this growth was poised to continue. This did, however, subject the company’s earnings to changes in exchange rates and this added greater risk to its earnings.
During Fiscal 2012, the Company invested in productivity initiatives designed to increase manufacturing effectiveness and efficiency as well as accelerate overall productivity on a global scale. The initiatives included the closure of a number of factories worldwide and a reduction of the global workforce. Outside of its growth potential in emerging markets, earnings growth for Heinz was expected to come primarily from these cost-cutting measures. The company planned to focus on realizing supply chain management efficiencies and invest less in product R&D as it focused increasingly on optimizing plant capacity utilization and minimizing waste. Another strategy used by 3G in similar acquisitions was in merging with other large companies to achieve even greater economies of scale and elimination of redundant expenditures; a future acquisition by Kraft would likely accelerate these cost-cutting initiatives.
1. DCF Valuation (60%)
Value the company using the DCF method as of fiscal year end 2013. You should calculate all required values, including enterprise value, equity value, and share price. Assumptions are provided in the DCF tab. You need calculate the value only using the “no-growth” perpetuity formula—you do not have to calculate the terminal value using the with-growth or EBIT multiple method.
2. Valuation using multiples (10%)
2a. In cell C60, calculate an implied enterprise value for Heinz using the EV/EBITDA multiple data in the “comps and rates” tab. You should calculate a “trailing” multiple using the 2013 data. Assume that all comparables in the list are good comparables for this purpose.
2b. After you do that, calculate an implied share price for Heinz in cell C65 using the enterprise value you calculated in cell C60.
3. Optimal capital structure analysis (30%)
Conduct an optimal capital structure analysis for Heinz in 2013. Is Heinz the kind of company whose leverage should be high, medium, or low? Provide support for your choices using the qualitative and quantitative evidence included here.
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