Buffett’s Secret Sauce

The debt underpinning the buyout of iconic brand Heinz has a particularly American flavour, writes Oliver Smiddy.  

$28 billion buyouts are rarer than a Paris Hilton brainwave in today’s market. So when a take-private of that magnitude comes up, appetite for a piece of the underwriting action can reach fever pitch.

So it has proved with the buyout of iconic brand H.J. Heinz by 3G Capital and Warren Buffett’s Berkshire Hathaway.

It helped of course that the deal came as something of a surprise, not least to the target’s chairman. William Johnson initially assumed 3G, which owns Burger King, had asked for a meeting with him to complain about his company’s ketchup (used in Burger King burgers). Instead, they wanted to buy his company for a generous 19 percent premium to its highest ever share price.

The deal, a record in the food industry, will be underpinned by a monster debt package, the likes of which have been rarely seen since the credit crisis. Banks are clamouring for exposure to the deal, which has had the pleasing effect for the sponsors involved of driving down pricing.

Thanks to massive demand in the US in particular, 3G and Berkshire Hathaway took the decision to alter the debt funding package at the eleventh hour. They dispensed with debt tranches in sterling and euros, preferring instead to use a dollar-only structure.

That structure comprises a $3.1 billion high yield bond, and term loans worth $9.5 billion. Both were bigger than originally planned, with the bond increased from $2.1 billion and the loan package increased from $8.5 billion. The original intention was to split the term loans between an $8.5 billion dollar tranche, alongside $1.4 billion euro (€1.1 billion) and a $600 million sterling (£396 million) loans.

But the pricing is perhaps of even greater note. On the first tranche of term loans (TLB-1), pricing was slashed by 50-75 bps to LIBOR plus 225 bps, with the second tranche (TLB-2) falling by 20-50 bps to LIBOR plus 250 bps. Both have a one percent LIBOR floor. The B1/BB- rated high yield bonds were priced at 4.25 percent (despite market chatter suggesting 5.75 percent was more likely).

Wells Fargo, JPMorgan, Barclays and Citigroup are understood to be bookrunning the bond issue. Wells Fargo and JPMorgan are also joint bookrunners on the term loan package, whilst a host of other banks, inlcuding Banco do Brasil, HSBC, Itau Unibanco, RBC and UBS are also involved.

The decision to raise dollar-only debt, while a disappointment to European bankers and investors, makes sense. It’s cleaner, easier and more efficient to use just one currency, and if appetite supports it – which in this case it certainly seems to – it becomes a no-brainer. Sources suggest the European tranches would have been more expensive too, so the sponsors are ultimately getting a better deal with the new all-American approach.

The sizeable debt package has also led to downgrades from the rating agencies however. Fitch Ratings, for example, slashed H.J.Heinz’s various credits to junk bond status (BB-). At $28 billion, the deal represents almost a 13x multiple to the company’s $2.2 billion EBITDA over the last 12 months, Fitch said.

The size of the deal means private debt funds are unlikely to gain exposure, at least in the early stages prior to syndication – this is very much a chance for Wall Street’s investment banks to flex their lending muscle. Aside from the sizeable fees it will bring in, the deal emphasises that the market can and will support mega-buyouts. Moreover, it will support them at aggressive debt-to-EBITDA multiples, and price debt so as to be highly attractive. With a rival bid emerging to Silver Lake’s Dell $24.4 billion take-private offer as we went to press, it seems the banking community is eager to back big buyouts. It’s not quite 2006 yet of course, but the signs are that leveraged lending is coming back in vogue.