Last week, legendary American investor Warren Buffett announced he was buying Heinz. Wherever you live in the world, be it Riyadh or Rhode Island, chances are you will have consumed some Heinz products during the course of the your life. Whether it is their iconic bottles of tomato sauce or equally famous tins of baked beans, it is basically impossible to get by without them. When the deal was announced it created headlines around the world, but, arguably, not enough.
In pure economic terms, the deal was huge. Warren Buffett, in conjunction with an investment partner, stumped up $ 28 billion to turn Heinz from a public company, where anyone could buy its shares on a stock exchange, to a private company, wholly owned by Buffett and his partner. It also follows hot on the heels of Michael Dell's $ 24 billion offer to the shareholders of the computer manufacturer he founded three decades ago. It is fair to say there is a theme emerging here. But why should the likes of Buffett and Dell be doing this?
One important reason is there is simply no need for these types of companies to be publicly listed. Owners of young, fast growing companies want to go public so they can access the equity capital markets and secure new funding. If a company's shares are traded on a stock exchange, it should, in theory, be possible for it to sell new shares to shareholders to raise new money. The company can then use that money to invest in its own business or, perhaps, buy other companies. If you are a private company, you don't have this option.
However, a company like Heinz, which has existed for over a century, does not need such sources of funding. It is a well-established business that generates a lot of cash. I have no doubt Heinz does in fact invest a lot of money every year in thinking up new ways of selling condiments to the world, but it is sufficiently profitable to pay for that itself. And then you have all the administrative hassle of being publicly owned. Boards of public companies devote massive amounts of time to investor relations, time that could arguably be better spent running their businesses. I am sure the people at the top of Heinz will not miss quarterly earnings calls every three months. And I am equally sure business leaders around the world will be looking on enviously as the Heinz management team bid a fond farewell to the public markets. The harsh truth is life is easier and simpler as a privately owned entity and that fact is cause for concern, not least for the world's stock exchanges.
The second interesting point about this mega deal is the choice of Heinz itself. Why did Warren Buffet, one of the shrewdest investors in financial history, spend so much money on an old, low growth maker of unexciting condiments. Unlike Apple for example, it is highly unlikely Heinz will somehow invent a new category of must-have consumer products that five years from now we will all be spending large amounts of money on. A bottle of sugary tomato sauce is just that, a bottle of sugary tomato sauce. Sure, there are new markets around the world Heinz can expand into, but fundamentally this is a low growth business.
The reason Warren Buffett invested in Heinz is startlingly simple: it is a safe, solid company that is not going to get blown off course by world events. Many investors nearly lost everything five years ago in the great financial crisis. While that was going on, sales of Heinz products barely changed. The truth is that the very worst can happen in the world, but people will still buy Heinz. It is safe to assume that in another hundred years, Heinz will still be doing what it does best. That is why Warren Buffett was willing to spend $ 28 billion on it. He was doing what he has been doing successfully for decades, buying reliable established companies and letting them go quietly about their business. Contrary to what a lot of stock analysts will tell you, this is how you safely build wealth over the very long term.
The last important point about this deal is who Warren Buffett chose to do it with. His partner is 3G Capital, a private equity firm backed by Brazilian billionaire Jorge Paulo Lemann. In fact, all Buffett is doing is putting up the cash. He made clear 3G Capital would be in charge operationally (in Buffett's own words, 'the ones who will be doing all the work'). Lemann is himself a highly successful investor and has been labelled the Warren Buffett of Brazil. 3G Capital also owns Burger King so there is an obvious joke to be made that they now own the sauce to put on their burgers. On a serious note, this is another example of how the world is changing: emerging markets investors have turned the tables and are buying iconic western brands. According to reports, Lemann was the one who took the deal to Buffett.
Of course, little will change. Heinz factories will carry on churning out condiments that we all know and love. But read between the lines and there is a lot to learn from this deal. The reality is genuine long-term wealth is built up slowly and steadily and, dare I say it, boringly. There are few certainties in life, but Heinz tomato ketchup is one of them, and that makes those bottles of sauce very valuable.
