Positions of the Various Stakeholders

Positions of the various stakeholders

Heinz Shareholders: the shareholders of Heinz should stand on the agreed position about this acquisition. The main reason is that, in 2006, although the market and economy were recovering, Heinz company's performance has been falling and, the stockholders began to lose confidence in the company's management. In 2006, the stockholders tried to put pressure on the company's management to get a more effective management strategy. Nelson Peltz and other stockholders gave the company two plans: one is selling the company and another one is shedding the non-core asset and repurchasing the stocks back to get more control of the company. After layoffs and buying back stocks, the company is still in a bad situation. The negative sentiment of shareholders to the company's management has led them to hope that the acquisition can proceed smoothly.

Management: from the management perspective, long-term mismanagement and increasing pressure from the stockholders make the acquisition an easier way to improve the company's current situation. When 3G Capital first proposed the acquisition, management immediately held a stockholder's meeting, which means that they were interested in facilitating the acquisition. The advisors of Heinz's board suggested that the acquisition's offer was fair. All this is evidence that management is willing to accept this acquisition.

Employees: employees may have concerns about the acquisition due to layoffs. The company's layoffs in 2006 and the acquisitions' indeterminacy both increased the risk of employees losing their jobs. Although they are also the stockholders of Heinz, we believe that employees worried about their jobs more than others. Therefore, they may oppose the acquisition.

The citizens of Pittsburgh: Leaning on the experience of the Heinz 2000's acquisition, the CEO of Heinz confirmed that, after the acquisition, they would keep the original location of the company and main operations. Therefore, the citizens of Pittsburgh should agree on the acquisition, or at least have a neutral attitude.

Principal risks and benefits of the transaction for 3G and Berkshire

Benefits: First, as the economy revived from 2008 to 2009 and the consumer's confidence grew, the beverage and food industry began to boom. The acquisition is an excellent chance to get benefits from the increase in this industry, Heinz especially has a good brand image and influence. Second, the growth opportunity was expected to expand because this industry's market was expending to the global market, such as China, Russia, and India. The potential growth in those overseas markets was significantly high, and this growth might continue to 2027. Therefore, the year 2013 was the right time for the proposed acquisition and to fight for more market shares in the US and overseas.

Risks: First, competition might be a great risk because the industry was improving, which means competition became more intense, and, extended to international markets therefore, they need to face the competitors in other countries. Second, the new strategy of 3G and Berkshire is that earnings growth is based on using improved technologies and supply chain management, decreasing R&D cost, and maximizing productivity and efficiency. To implement such plans and change past production and operation models are great challenges to 3G and Berkshire and they will face the risk of failure. Third, although economists believed that the economy would grow after 2006, the GDP growth still has uncertainty. If the economy goes in the opposite direction, 3G and Berkshire will face loss.

Market Reaction to The Acquisition Announcement

The share price increased to $72.5 per share on 14 February, 2013. The HNZ’s equity analyst commented that the acquisition is a fabulous deal for HNZ shareholders because of the absolute high premiums. The exoteric equity analyst mentioned obscurely that the Heinz merger may not bring expected benefits, but it is definitely a good deal for the shareholders. The analyst’s comment in Heinz financial report is that Heinz specific financial characteristics satisfy Berkshire’s preference for companies and Berkshire’s strong financial firepower makes private equity unlikely to top the bid.

DCF Valuation

In our DCF valuation, we use the following assumption:

Revenue to grow at 1.3 percent per year

EBITDA margin to remain constant at 17.6 percent per year

Capex to increase to $450M in 2013, then decline by 10 percent per year until 2018

Depreciation expense to grow from 75 percent of Capex in 2013 to 100 percent of Capex in 2018

Amortization to remain at $47M per year

Net working capital needed to fund growth will be $50M in 2013, then $30M per year until 2018

Tax rates remain constant at 35 percent

Discount rate to be 6.5 percent for every forecasted year

323 million diluted shares outstanding

Debt value is 4,749 million

Figure.1 DCF Valuation

Based on our assumptions above, we get the forecasting financial data in figure.1. Then, we use Equation. 1 below to compute the free cash flow to firm:

Equation. 1:

FCFF=EBITDA*(1-T)+(D+A)*T-CAPEX-WC Inv

Next, we use Equation. 2 to calculate the terminal value:

Equation. 2:

Terminal Value=(CF(0)*(1+g))/(r-g)

Finally, we discount each cash flow to get the equity value of Heinz is $21.90 billion ($67.79per share), if the acquisition premium is 20 percent, the equity value of Heinz is $16.28 billion ($81.35 per share). And, the transaction price included debt of $4,749 million should be $31.03 billion (20 percent acquisition premium).

Comparable Company Valuation

In comparable company valuation, we consider all the competitors mentioned in the case material should be used to estimate the value of Heinz. All the competitors are classified in the food industry, and each competitor competes with Heinz in a different product