Heinz

Classically, the “Background of the Merger” section of a merger proxy is where you get the fun details of how the deal came to be, from which you can perhaps extract a sense of whether or not the deal is a good one for shareholders. But it’s written by lawyers so sometimes their idea of “fun details” differs from yours and mine. Here is a critical moment a week before Heinz agreed to be bought by 3G and Berkshire Hathaway, from Heinz’s merger proxy:

On February 8, 2013, representatives of Davis Polk and Kirkland & Ellis had a conference call to continue negotiations concerning the merger agreement. During the call, Kirkland & Ellis noted that the Investors were willing to accede to Heinz’s request that Heinz be permitted to pay regular quarterly dividends prior to closing of the Merger. Kirkland & Ellis noted that, while Heinz had reserved comment on the remedies for a debt financing failure proposed by Kirkland & Ellis in the initial draft of the merger agreement, the Investors’ willingness to enter into a transaction was conditioned on Heinz’s remedies in those circumstances being limited to receipt of a reverse termination fee. Kirkland & Ellis noted, however, that the Investors would withdraw their initial proposal that Heinz would not be entitled to any remedies if the merger were not consummated due to a failure of the debt financing that resulted from a bankruptcy of those financing sources. In addition, Kirkland & Ellis stated that they expected that the Investors would be willing by their guarantees to guarantee liabilities of Parent and Merger Sub under the merger agreement (including liabilities for breach of the merger agreement) up to a cap on liability equal to the reverse termination fee if it became payable (as the Investors had previously proposed). Kirkland & Ellis also reiterated that the Investors were unwilling to agree to a “go-shop” provision but confirmed that they were willing to accept a customary “no-shop” provision with a fiduciary out, which would allow the Heinz Board, subject to certain conditions, to accept a superior offer made following the announcement of the merger agreement. Davis Polk replied with a slanderous description of Kirkland’s mother’s sexual proclivities. Davis Polk suggested that, in lieu of a “go-shop” provision, Heinz might consider a two-tiered termination fee, with a lower fee payable by Heinz if it terminated the merger agreement to enter into an alternative transaction within a limited period of time post-signing. Kirkland & Ellis responded that, while the Investors might have some flexibility on the size of the termination fee, the Investors would not accept a two-tiered fee. Finally, Kirkland & Ellis noted that the standard for efforts to obtain antitrust approvals proposed in the most recent draft of the merger agreement was too onerous in light of the circumstances, but that the Investors would agree not to acquire other food manufacturers during the period prior to closing of the merger if doing so would interfere with obtaining antitrust approvals.

Oh so that’s what happened!1 Read more »

  • 19 Feb 2013 at 3:16 PM

SEC Ruins One Anonymous Swiss Person’s Lucky Day

The SEC’s Heinz insider trading complaint is a delightful epistemological puzzle. The story goes that, on February 13, some person or persons with a Swiss bank account bought 2,553 Heinz June $65 calls (255,300 shares), with the stock at just over $60, for $0.30 – $0.40 per share (around $90,000 total). The next day, Heinz announced that it was being bought for $72.50, the calls went to ~$7.33, and he/she/they made almost $1.8 million on paper. That’s a one-day return of 1,979%, or approximately Error 1 annualized.1

Which is pretty good! Except those gains are on paper, and that paper has been impounded by a federal judge at the SEC’s request, because that story is pretty much too shady not to be insider trading. But what I just told you is the whole story that the SEC appears to know: there’s no proof that it’s insider trading as opposed to just fabulously lucky trading. When I win the MegaMillions next week my one-day return will be considerably in excess of 1,979%, and no one will have leaked the winning numbers to me in advance, as far as the SEC knows anyway. Though it is suspicious that volume in the HNZ $65 calls was up just a smidge that day: Read more »

  • 14 Feb 2013 at 6:42 PM

Warren Buffett Levers His Own LBO

The new hotness appears to be large cash-rich companies directly providing subordinated financing for big LBOs. Microsoft bound itself to Dell via sub debt in its LBO, and now Warren Buffett’s Berkshire Hathaway is doing a very odd LBO of H.J. Heinz with Brazilian private equity firm 3G Capital. Heinz’s announcement of the merger is brief and dull, but Buffett has filed his commitment letter and disclosed that he will “invest $12.12 billion to acquire a package of equity securities consisting of preferred and common stock and warrants issued by Holding. The preferred stock will have a liquidation preference of $8 billion, will pay or accrue a 9% dividend, and will be redeemable at the request of Holding or Berkshire in certain circumstances.” So he’s providing $4bn of common equity and $8bn of preferred leverage. The remaining $11-ish billion of the $23-ish billion purchase price will come from 3G (equity) and from a JPM/WFC-led debt financing.

There’s a basic tactical explanation for the structure, which is that it solves for this equation:

  • Berkshire is an unlevered1 equity investor,
  • 3G is an LBO shop,
  • it’s 3G’s deal – they sourced it, they’ll operate it, they did the press conference – so 3G needs to own more than 50% of the equity,2
  • but they’re not gonna put up, like, $12 billion in equity.

Read more »