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Heinz’s Growth Prospects Under New Private Equity Ownership

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Heinz, the world’s 13th largest packaged food manufacturer, is set to be taken over by two private equity firms, Berkshire Hathaway and 3G Capital, for US$28 billion. Under this new private ownership, with a strong financial boost Heinz could be in a good position to intensify its international growth, M&A activities and potentially realise its long-stated ambition to become a major global player in baby food. Although becoming part of one of the world’s most successful private equity groups offers good financial synergies, it cannot benefit from operational leverages in the same way if it was integrated with a food industry player.

The deal has already been approved by the board but still needs to be voted on by the shareholders. It is expected to be finalised during the last three months of the year. The high cost, which consists of the US$23 billion price and company debt of US$5 billion, reflects Heinz’s global reach, strong brand equity and consistently positive financial performances. For the fiscal year ending 30 April 2012, Heinz reported net sales of US$11.6 billion, up 9% on 2010. In line with its overall strategy to grow its emerging market presence, Heinz reported growth of 21% in these regions in 2011.

Warren Buffett, founder and Chief Executive of Berkshire Hathaway, has a reputation for investing with a long-term vision in iconic global brands; he owns stakes in companies from Coca-Cola and IBM to General Motors. In order to build Heinz’s scale and long-term performance there is a possibility that the company will benefit from further bolt-on acquisitions under its new ownership.

Positive circumstances for Heinz’s baby food ambitions

Heinz has long stated its ambition to become a major global baby food player, but its global value share in this highly consolidated category still stands at just above 3%, and its largest single market is Italy, which accounts for over one third of its global baby food sales. However, it has to be said, the company’s second largest baby food market is China, where it posted a 26% CAGR over the 2007-2012 period.

However, in order to really expand its revenues in the most dynamically growing packaged food category its new owners will have to invest in acquisitions in baby food. Opportunities for bolt-on acquisitions are likely to arise from the Pfizer/Nestlé deal in baby food. Heinz, as opposed to other global baby food players, is very well positioned to benefit from opportunities that may arise. The markets most likely to see Nestlé shed assets in order to gain regulatory approval and which feature in the top 10 most dynamic by absolute value sales are Venezuela, Mexico, Thailand and Saudi Arabia, although Nestlé has not yet announced any intention to sell.

Given the highly consolidated nature of the baby food category, Heinz would be in a good position to purchase key baby food assets ahead of the likes of Danone, Mead Johnson or Abbott. This situation together with the new ownership, management and financial boost could see Heinz realise its baby food ambitions.

More aggressive emerging market expansion

One of the key strategies on which Heinz has been focusing, and which should gain a stronger push under its new ownership, is to grow its emerging market business to counter weak demand in developed markets, on which it remains heavily reliant.

So far, it has done this through two notable acquisitions, the Quero brand from Coniexpress SA Indústrias Alimentícias in Brazil and Foodstar in China. The packaged food market, including Heinz’s current target category - sauces, dressings and condiments - in both countries is expected to grow dynamically over the 2012-2017 forecast period. However, Heinz will need to enhance its presence in these highly competitive markets to fully benefit from the growth opportunities present. Currently, the company lags behind both early mover multinationals, eg Nestlé and Unilever, and a high number of fast growing local competitors.

In Brazil, Heinz’s intention was to roll out its Heinz range of sauces, dressings and condiments and follow what it calls its “buy and build” strategy for organic growth. In effect, Heinz aims to use the Quero distribution network to roll out its core products in the Brazilian market and invest in growing the Heinz brand along with Quero. Heinz will likely therefore become present in previously untapped categories in Brazil over the forecast period.

In China, meanwhile, it is intent on building on the Foodstar acquisition to grow not only its presence in soy sauces but also leverage this acquisition to grow its Heinz ketchup and other sauces. Within China, Heinz plans to expand the Master brand of soy sauce beyond its stronghold in southeast China and use that base to expand into other Asia Pacific markets, notably Indonesia.

Under new private equity ownership Heinz will likely benefit from stronger investment in more aggressive emerging market expansion, although it will likely face strong competition from peer multinationals with longstanding operations and market experience. Its existing strategy of purchasing well-performing local players could be a good route to market for sustainable growth.

New investment to sustain growth momentum

As Heinz will be under the private ownership of a financial investment company it will continue with its current operational infrastructure, brand portfolio and market reach. However, its growth dynamism and direction could change significantly over the short to medium term, and given the reputation and track record of its new owners, the company has positive prospects for growth if opportunities are recognised.

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