Mergers, Acquisitions and Restructuring - 2204

Group Assignment
H. J. Heinz M&A

2021/22 - T4

Professor Pranav Desai

Done by:
Bernardo Escada, 32354
Gonçalo Teixeira, 32067
Rui Ramalhão, 38934
Vasco Barreiros, 48179
Table of Contents

Q1....................................................................................................................................................................2
Q2....................................................................................................................................................................4
Q3....................................................................................................................................................................6
Appendices...................................................................................................................................................7
Sources........................................................................................................................................................10

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Q1. To conduct a standalone valuation of Heinz, three methods were used: DCF, multiples from
comparable companies, and multiples from comparable transactions. The summary of the several
valuation results, as well as the football field chart, is shown in the Appendix 1. Overall, the price
target for Heinz shares is $ 67.12, with values varying from $ 47.21 to $ 78.15, depending on the
types of valuation performed and respective assumptions used.
First, a DCF valuation was performed with the assumptions present in the “HNZ Alt”
spreadsheet. Besides, a terminal growth rate of 1.3% was assumed, given that the food packaging
industry is a mature one and Heinz is a well-established leading player in the market. So, there
doesn’t seem to be many opportunities for great long-term growth, and instead of assuming as
usual a terminal growth rate equal to the long-run economic growth, a slightly reduced growth rate
is used. The assumptions seem to indicate that Heinz already is in a steady-state regarding
revenue growth, thus throughout our valuations, we assume the same terminal growth rate from
this set of assumptions. Free Cash Flows were calculated and discounted at the given rate, leading
to an Enterprise Value of $ 22,919M. Subtracting the Net Debt in the Balance Sheet of $ 3,532M
(assumed to be a good proxy for the market value of Debt), and the Minority Interests of $ 166M,
yields an Equity Value of $ 19,221M, corresponding to a share price of $ 59.45. The resulting
share price was subject to a sensitivity analysis, accounting for other possible and reasonable
values for the terminal growth rate and the discount rate. As expected, the share price is predicted
to increase more with increases in the growth rate and decreases in the discount rate – and
decrease in the opposite case. The sensitivity analysis also allows us to arrive at a possible range
of prices, calculated with the first and third quartiles, of $ 47.21 - $ 69.29. With the Football Field
Chart, one can observe that this valuation is the one with the largest range and the one which
allows for the lowest possible share price. This occurs because the assumptions, particularly
regarding top-line growth, are the most conservative ones. Nevertheless, the price target resulting
from this valuation is in line with the market price of Heinz at the time of the announcement ($
58.35), indicating that the market correctly prices the company. Please refer to Appendix 3. for the
full list of assumptions and the tables with all calculation results.
A second DCF valuation was conducted, based on the second set of assumptions provided
in the case for Revenues, EBITDA, and EBIT, which are more optimistic regarding the evolution of
the company’s operations and results from 2014 onwards. In this case, Heinz is not yet in a steady
state. Rather, it is entering a phase of significant top and bottom-line growth. Further assumptions
were made in this second valuation. The assumption regarding the terminal growth rate is the
same as before, for the same reasons. The weighted average cost of capital of Heinz was
calculated with the available information, with a result of 5.30%. However, this value seems to be
quite low regarding the industry’s average. Damodaran’s website shows that, as of Jan. 2013, the
average WACC for the Food Processing industry was 6.02%. To be conservative, reduce the risk
of overvaluing Heinz, and maintain the valuation inputs as similar as possible to the first one, we
assume a discount rate of 6.50% in this situation. The tax rate is the statutory tax rate of 35%, for

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three reasons: to maintain coherence with the first valuation; because even though the Proxy
Statement indicates estimates of effective tax rates for the period in consideration these are very
hard to predict due to one-off effects, particularly in times of economic turmoil as we were
experiencing at the time, in the wake of the financial crisis; and because the calculation of discount
rates in the DCF valuation is based upon statutory tax rates. As this set of assumptions does not
provide any estimates for CAPEX or NWC, we assume that capital spending, as indicated in the
Proxy Statement, is a good proxy for those. In that document, Heinz forecasted that it will be
between 3.5% and 4% of revenue every year. So, we assume a constant average of 3.75%. The
remaining items and steps are equal to the previous valuation. This results in an Enterprise Value
of $ 25,3990M, Equity Value of $ 21,701M, and share price of $ 67.12. A sensitivity analysis was
conducted as before, pointing to a share price range of $ 53.40 - $ 78.15. This valuation also
shows a high range of possible share prices, as well as the highest possible value across all
results. The price target is closer to the acquisition value of $ 72.50 per share (which lies in the
range we propose). It seems 3G Capital and Berkshire Hathaway based their proposal upon
expectations of considerable growth opportunities for Heinz in the coming years. Please refer to
Appendix 4. for the full list of assumptions and the tables with all calculation results.
Regarding the valuation with multiples from comparable companies, the information
provided in the case allowed the computation of three widely used ratios in the industry: the
EV/EBITDA, EV/FCF, and P/E multiples. Overall, these multiples show less dispersion than the
other valuation methods. The EV/EBITDA multiple points to a share price in the $ 57.27 – $ 61.86
range and a target price of $ 60.70 from the median multiple. The EV/FCF points to a $ 50.93 – $
61.90 range and a target of $ 59.79. The P/E multiple points to a $ 59.35 – $ 65.93 range and a
target of $ 63.02. All in all, these values are in line with the market valuation of Heinz at the time of
the acquisition. However, they are considerably below the acquisition price of $ 72.50. The
explanation may lie in the fact that the valuations only consider current data and not future
expectations. Furthermore, industry multiples may underestimate companies that perform above
average.
Finally, a valuation using multiples from comparable transactions was performed. From the
list of transactions provided in the case, a selection was made based upon three sets of
considerations: (1) a research made regarding the Target's business in several online sources; (2)
the list of precedent transactions used for Heinz valuation purposes present in the Proxy Statement
presented to shareholders and filed with the SEC in 2013, regarding the acquisition by Berkshire
Hathaway and 3G Capital; (3) large EV, in line with the ~$ 18Bn market cap of Heinz at time of the
announcement of the acquisition. This way, both operational and financial considerations are
incorporated into the analysis. Furthermore, two transactions that are considered in the Proxy
Statement, but are not present in the case study, were included in the analysis. These are the
acquisition of Danone’s biscuits division by Kraft Foods in 2007 and the acquisition of Best Foods
by Unilever in 2000. The list of the transactions considered for valuation purposes, as well as all

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the results, are present in Appendix 6. The valuation points to a share price of Heinz in the $ 59.18
– $ 77.00 range and a target price from the median multiple of $ 72.54. These results represent a
considerable premium regarding the share price at the time of the deal announcement, but are
clearly in line with the acquisition price, thus indicating that the transaction is in line with past
market deals.
In conclusion, it seems that the market currently values Heinz correctly – i.e, the stock
seems to be neither over nor undervalued, as seen by the first DCF and the comparable
companies’ valuations. However, both new forecasts of future growth and the historical
comparable transactions point to a higher price of the stock in line with the deal proposal by 3G
Capital and Berkshire Hathaway.
Q2. From the case, both Berkshire Hathaway and 3G Capital assumed virtually zero synergies
coming from Heinz’s acquisition, mainly resulting from the fact that the management team and the
buyers insisted that Heinz would maintain its operations independent from the buyers’ portfolio. At
the same time, when examining the portfolio of similar investments made before by Berkshire
Hathaway one can observe it owned See’s Candies and Mars Inc. (both manufacturers and
distributors of candies, especially chocolates), The Pampered Chef (which has its core activity
focused in kitchen accessories and tools), and Dairy Queen (which operates in fast-food
franchising business). Furthermore, 3G Capital owned Burger King Holdings (which operates in the
fast-food franchising business). Although all these firms were assumed to be in the same food
sector as the H.J. Heinz, after a close look at it, we observe that these companies are distinct from
Heinz in terms of final products, markets, and consumers. For instance, while Heinz sold a variety
of products, ranging from condiments (including ketchup) to infant nutrition, See’s Candies is a
producer and distributor of candies and chocolate around the globe, The Pampered Chef offers
mainly bakery accessories and recipes for the customers to try at home, and both Dairy Queen
and Burger King Holdings are fast-food restaurant chains, that operate in a franchising format.
Therefore, it is not such a surprise that the synergies suggested was zero, since Heinz will
continue to operate independently, and the buyers’ portfolios don’t exactly match the business
model of Heinz. Furthermore, synergies would only be fully obtained if the firm did not operate
independently, as by definition changes can only be considered as synergies if the company was
not able to achieve them in any other way without the deal. Preferably they would happen by
merging with another related company, which is not the case and makes it hard to achieve
synergies in terms of economies of scale and centralization of administrative functions. To
conclude, the assumption of no synergies is coherent with other similar deals since there is no
direct integration between Heinz and other strategic players.
Nonetheless, we believe that both buyers can still bring value to Heinz in this transaction.
We cannot forget that 3G Capital is a private equity firm with a strong track record in similar
transactions in the sector and cost-cutting approaches in the medium-long term, and Berkshire
Hathaway is a massive holding company for a multitude of businesses, with an extensive network

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of contacts in the industry. With this said, their experience in the sector, as well as their widespread
network of contacts, could open space for Heinz to explore new customer segments, and
geographies or negotiate better deals. These could contribute to value creation, growth
opportunities, and improvements in the business profitability and efficiency. So, we argue that the
primary source of value creation in this transaction would arise from the control function. Given 3G
Capital and Berkshire Hathaway's nature, it is expected a change of control following the
transaction, by changing the management team. Indeed, after the transaction, the CEO was
replaced by Bernardo Hees, former CEO of Burger King and a “cost-cutting master” in the industry.
From this, we defined two different scenarios. The first is mainly focused on changes in the
management team (change in control), by involving a new and specialized team that will be
focused on cost-cutting and value creation opportunities. While the second does not only include a
change in control, but also an integration between Heinz and other strategic portfolio companies
and players, which could create some attractive and valuable growth prospects. Additionally,
despite Heinz's brand recognition and positioning as a market leader, it was far from reaching its
optimal value, mostly due to ineffective management.
The first synergy, applicable in both scenarios, collides with both revenue and cost
management, and it comes from the know-how and specialized knowledge in the industry that will
arise from a new and specialized team and is ideally achieved through cooperation with existent
portfolio companies. Know-how coming from specialized professionals and/or strategic portfolio
companies will boost revenues and cut operating costs, raising the profit margin and the value of
the firm in the medium/long term. From the historical income statement of Heinz, we can see that
the gross margin was approximately 36%, which was below the industry’s average, around 42.5%.
In both scenarios, we assumed that the company would achieve the industry’s gross margin in the
medium term.
The second synergy, applicable in both scenarios, arises from looking at previous
acquisitions made in the industry, as well as by 3G Capital and Berkshire Hathaway's prior
transactions, in which we noted that WACC reduced between 0,5% and 1,5% (synergy premium).
Both 3G, Berkshire, and Heinz are established companies with a reasonable maturity to access
distinct capital markets with more advantages, like lower financial costs and more bargaining
power in credit deals.
The third synergy, applicable in both scenarios, arises from more efficient cost
management. In an acquisition, SG&A, in general terms, usually decreases, for previous
transactions done by these two players, generally the cost reduction amounts to 20% over the
medium term. Hence, we defined a decrease of 10% for the management team scenario and 20%
for the integration scenario. Therefore, as our case is not an exception, we believe that in the first 2
years, the decrease in SG&A will be substantial, decreasing $ 150M ($ 75M) and $ 100M ($
62.5M), respectively, and after that decrease constantly at a pace of $ 50M ($ 25M) annually.

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 Despite the above synergies presented, the firm can additionally benefit from further
integration and control. Starting with revenue synergies, Heinz could benefit from cross-selling to
other portfolio firms, which can be illustrated through the deal between Heinz’s sauces and Burger
King, which are now present in the entire fast-food chain. As told before, the know-how and
network available could pave the way for Heinz to have access to new distribution channels and
regions around the globe, which will boost revenues in the medium term, for example, the
presence of 3G in South America could allow the internationalization of Heinz to emerging markets
like Brazil. Moving to cost synergies, the cooperation could improve and integrate logistical
operations, such as by sharing supply chains (trucks, warehouses, regional partners), and so
decrease operating costs. Also, the network available could increase Heinz's bargaining power
when dealing with suppliers and distributors. Furthermore, through cooperation, Heinz could
benefit from the brand value and power of other strategic portfolio firms.
To conclude, this specific acquisition does not have synergies due to 3G and Berkshire not
planning to integrate Heinz with other strategic players, however, the acquisition seems to have
some value creation sources, essentially due to a change in control, more specifically changes in
the management team, that will bring know-how and expertise to the business.
Q3. As advisors to the buyers, it is essential to determine the price range that the buyers would
consider for the target, therefore we calculated the enterprise value with and without synergies,
and then defined the optimal range of prices.
When looking at our DCF analysis for the base case scenario, without synergies, we opted
by doing two of them: one using “HNZ-Alt” sheet information and another using Heinz's 2012 10-K
financial forecasts. The share prices obtained were $ 59.45 and $ 67.12, respectively. The second
one ends up being more aggressive but at the same more realistic, since the financial forecasts
done by Heinz before the acquisition were more optimistic in the medium term. The share prices
offer a premium of 2% and 15% on top of, at the time, the current market share price of $ 58.35.
Furthermore, the multiples from past transactions point to a share price of $ 72.54.
On the other side, for the valuation with synergies, the share price was $ 73.44 for the
management scenario and $ 77.38 for the integration scenario, with Heinz's 2012 10-K financial
forecasts. Considering the second scenario as our proxy, we conducted two sensitivity analyses.
The first one (Appendix 5) is regarding the terminal growth rate and the discount rate giving a
range between $ 55.50 and $ 138.62. The second one (Appendix 6) is regarding the % of
synergies realized, assuming a range between 0% and 100% of concretization of the considered
synergies, outputting a share price from $ 68.61 up to $ 77.38. The later assumes a synergy value
on the share price of $ 8.77.
All in all, we propose a price range from $ 59.45 (the standalone value of the company with
the more conservative forecasts) to $ 77.38 (the value considering the full realization of the largest
volume of synergies). Considering all of this, we can conclude that Berkshire and 3G did a decent
deal in terms of the price paid for Heinz according to our valuation. Despite the premium paid, we

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argue that the price offered seems reasonable accordingly to the possibilities of value creation and
growth in the medium term for Heinz.

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Appendices
Appendix 1. – Summary of Valuation Results

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Appendix 2 – Football Field Chart

Appendix 3. – Comparable Transactions

Appendix 4. – WACC Calculation

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Appendix 5. – Sensitivity Analysis of Share Value for Discount Rate and
Terminal Growth Rate

Appendix 6. – Sensitivity Analysis for % of Synergies Realized

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Sources
Further information, beside that which was provided in the case study, was found in the
following sources:
 Lectures Slides and Materials.
 Travis, T. (2013, 02 18). Seeking Alpha. Retrieved from 4 Reasons Why Berkshire/3G Deal
for Heinz is a Home Run: https://seekingalpha.com/article/1201241-4-reasons-why-the-
berkshire-3g-deal-for-heinz-is-a-home-run.
 Danshku, S., & Munshi, N. (2015, 03 26). Financial Times. Retrieved from 3G cost-cutter
struggle over food sales: https://www.ft.com/content/abd94220-d3d6-11e4-a9d3-
00144feab7de.
 Bloomberg Platform (Comparable Transactions Targets’ Description).
 Wikipedia Website (Comparable Transactions Targets’ Description).
 Damodaran, (2013, 01). NYU Stern School of Business. Retrieved from
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.html.htm.
 SEC K-10 - United States Securities and Exchange Commission. Retrieved from
https://www.sec.gov/Archives/edgar/data/46640/000119312513089866/d491866dprem14a.
htm.

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