Of late, the world's most successful investor, Warren Buffett, has made no secret of the fact that Berkshire (BRK.B) is looking to make a large acquisition. In a recent piece, I suggested that Waste Management (WM) might be a good fit for Berkshire. I also recently suggested that The Clorox Company (CLX) might be a good fit for Berkshire. Similarly, I believe H.J. Heinz Co (HNZ) would also be a good fit for Berkshire.
Buffett Buys What He Knows
One trademark of Warren Buffett's investing style is that he only buys businesses that are simple and that he truly understands. In terms of private companies, Berkshire's holdings are focused in a few areas: insurance, retail operations, railroads, construction, and chemicals. Some notable companies owned by Berkshire include GEICO, General Re, Dairy Queen, See's Candies, Acme Brick, and Benjamin Moore. Berkshire's two most recent massive acquisitions were railroad operator Burlington Northern Santa Fe and specialty chemical producer Lubrizol. HNZ meets this criteria as the company that is simple to understand. HNZ, a food manufacturing company, creates and sells products that make life taste better.
Brands and Moats
Buffett often says that he likes to buy high quality brands and companies with wide competitive moats. Evidence of what Buffett likes to buy can be seen by looking at his five largest stock holdings: Coca Cola (KO), Wells Fargo (WFC), IBM (IBM), American Express (AXP), and Procter & Gamble (PG). All of these companies have something in common: they have highly visible, trusted, and valuable brands. Likewise, HNZ is a company with many strong brands, most notably, Heinz Ketchup. However, Heinz world famous Ketchup is not the only strong brand in HNZ's portfolio. Other highly respected brands include Classico past sauces, Ore-Ida french fries, and TGI Fridays frozen foods. The reputation of these brands has been built over many years and has created something of a moat for HNZ.
Price & Valuation
Currently, HNZ trades at 18.7 times trailing earnings and 15.4 times forward earnings. Based on these numbers, it is difficult to argue that HNZ is "cheap", but Buffett does not necessarily seek out "cheap" investments. Buffett has famously said:
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
In terms of the value of the deal, currently HNZ's equity value is $18.75 billion and the company has debt of $5.04 billion. So, given a reasonable premium, the total cost of the deal for Berkshire would be likely be between $25 billion & $30 billion. Buffett has said that he is looking for a deal between $20 billion & $30 billion so HNZ is just the right size.
Today, the Heinz family and trusts own only a fraction of the company. This was not always the case, but in 1995 the Heinz family and endowments sold a large portion of their holdings bringing their combined holdings of HNZ to under 4 percent. Today, no members of the Heinz family sit on the board of the company. The lack of family control over the company means that HNZ is a viable takeover candidate.
Given its simple and easy to understand business, competitive advantage, market leading products, and price, HNZ is a good fit for Berkshire and a possible target for Buffett. However, my speculation that HNZ could be takeover target for Berkshire is not the only reason to consider the stock. The company's solid growth prospects in addition to stealth dividend make this stock worth owning for any long-term investor, not just Buffett.