Investors interested in the HNZ arbitrage trade won't want to miss this epic battle. First I'll explain the trade, a private investment group led by Warren Buffett has offered to purchase one of the world's most unique product companies, Heinz, for $72.50 per share.
When we use comparable analysis on another similar company, Hershey (HSY), it becomes clear that the Buffett offer is wholly inadequate.
The market is presently pricing Hershey at 29 times trailing twelve months EV/EBITDA, whereas Mr. Buffett's offer for Heinz is only 13.5 times trailing twelve months EV/EBITDA. Granted there are other metrics which can be used to support a lower valuation for HNZ, but using the EV/EBITDA comparable, you get a purchase price for HNZ of $167, an amazing 130% above the current Buffett offer!
The HNZ arbitrage trade requires an investor with the wherewithal to negotiate a better price for HNZ shareholders. The investor "steps in" to HNZ at $72.50 and hedges his position using options in the event the deal falls a part. The cost of the hedge is the investors downside risk. The upside is the price above $72.50 that he can negotiate with the Buffett-led group. Given how deeply the Buffett offer is discounted, there is room for significant upside. At $100 per share, it's still a good deal for Mr. Buffett and nearly 40% above the current offer.
Mr. Buffett's recent discount offer for Heinz has left him vulnerable. Now we encourage Carl Icahn to enter the contest. Mr. Icahn is an investor with the wherewithal and experience to get the HNZ deal done at a fair price for shareholders.
These two legends of investing have often sparred over who has the best track record. Let's look at the tale of the tape.
According to a recent article written for Motely Fool, from 1968 through 2011, Warren Buffett compounded Berkshire Hathaway's book value at an annualized rate of 20% while during the same time period Carl Icahn compounded an initial $100,000 stake at 31%.
At 77 years old Mr. Icahn still has a few years to catch up to Mr. Buffett, 82 years old, in the net worth category, but a recent check on the Forbes list of wealthiest Americans, reveals that it will be difficult, with Mr. Buffett weighing in at $46 billion compared to Mr. Icahn at just under $15 billion.
Who will be the champion of the investing universe, the stage is set for a title bout!
And now for the rules of the ring,
1) A Draw: If the HNZ deals falls a part on account of Mr. Icahn's interaction, we will have to rule the contest a draw. Although Mr. Icahn would have ultimately held true to his purpose in fighting for shareholders, and he would have achieved a moral victory for shareholders the world over.
2) Mr. Buffett Wins: If Mr. Icahn steps in and the HNZ deal closes at the current offer price of $72.50 or less.
3) Mr. Icahn Wins: If he steps in on behalf of shareholders and the HNZ deal closes above $72.50.
Friends of Mr. Buffett and Mr. Icahn, reach out to them and let them know that a challenge has been issued.
Maybe Mr. Ackman will bring the popcorn.
Disclosure: I am long HNZ.