Buffett’s go-to billionaire deal maker has Wall Street on edge
IT’S TIME for Jorge Paulo Lemann to get back in the hunt.
That, anyway, is the word inside the food industry, where the Brazilian billionaire has been doing blockbuster deals roughly every two years. In 2013, he persuaded Warren Buffett to team up on H. J. Heinz. Then, in 2015, the duo orchestrated the US$ 55 billion merger of Heinz and Kraft Foods.
“It’s logical that this would be the year,” said David Palmer, a food industry analyst at RBC Capital.
The talk has traders on edge. Last month, a story in a little-known Swiss magazine, resurfacing well-worn speculation about Lemann’s plan to buy Mondelez with Buffett, spurred an immediate pop in the US snack giant’s shares. ( They soared 28 per cent in just a few minutes.) So far, no deal has been announced. Regardless, the question of what Lemann might go after in 2017 has just about everyone grasping for leads. Besides Mondelez, some other names include General Mills, Kellogg and Campbell Soup.
There is even talk that Buffett’s beloved Coca- Cola, a prospect that some dismissed as fantasy, could be in play.
All the attention goes to show just how much Lemann, 77, has reshaped and influenced the global food and beverage industry. In the past decade, Lemann and his Brazilian partners at 3G Capital have made their names with a run of splashy deals, including Anheuser-Busch and Burger King, and a singular vision of hacking away costs at every turn.
His team has been so effective at boosting profits that companies have had to change how they do business – or risk becoming targets themselves. Some industry insiders have criticised 3G’s methods as draconian and short- sighted, and suggest the constant need for acquisitions reflects the fact that cost cuts alone can’t boost sales.
At Mondelez, Chief Executive Officer Irene Rosenfeld says a more balanced approach to improving margins will ultimately lead to bigger returns for shareholders.
“We’ve been walking and chewing gum at the same time,” Rosenfeld said. She declined to discuss whether the maker of Cadbury and Oreos, a longrumoured target for 3G, has been approached about combining with Kraft Heinz.
Nevertheless, Lemann has made a believer out of Buffett, widely recognised as one of savviest and most successful investors in the world.
With Buffett, who’s sitting on an US$ 85 billion ( RM383 billion) cash hoard, the strategy is simple.
Buffett ponies up the money to help finance the acquisitions and Lemann’s team does the dirty work. Invariably, that means firing workers, closing factories and paring unnecessary expenses.
When all the savings are wrung out, 3G looks for the next target. And there’s no shortage of options in the packaged-food industry, which is struggling as consumers shun traditional grocery staples for healthier options.
At Heinz, the first deal that Buffett did with Lemann, 3G immediately installed its own managers. They shuttered five factories, did away with employee perks and eliminated more than 7,000 jobs.
After just 18 months, Heinz’s profit margins ( based on a measure known as Ebitda) rose to an industry-leading 26 per cent from 18 per cent prior to the takeover.
That paved the way for the Kraft Foods takeover, which was announced in March 2015. At the time, 3G promised to cut US$ 1.5 billion in annual costs by the end of 2017. So far, it’s ahead of schedule.
According to research from Bernstein, Kraft Heinz is already 88 per cent of the way there. Margins are also up. Before the acquisition, Kraft’s Ebitda consistently hovered around 20 per cent of revenue. Now, the combined company’s margin is at 30 per cent.
Investors have taken notice. Shares of Kraft Heinz have risen 23 per cent since the company began trading in July 2015 – more than double the gain of consumer staples stocks in the S& P 500 Index. — WP-Bloomberg