Buffett Buying Heinz – Not As Expensive as Appears

Berkshire Hathaway buying Heinz is unlike any deal Buffett has ever done.  In his past deals he was always a passive owner – he let existing management continue to run the company.  In this case 3G, a private equity firm that has done terrific turnarounds in the past, will be the new management.  They are putting in $1 billion of capital for half of ownership, but also a lot of sweat capital.  On the surface Buffett is paying 20 times earnings, a fairly high multiple even for this high-quality business, but 3G involvement will likely elevate the earnings power of Heinz significantly over time.  So this is a classic Buffett deal in one respect: Buffett is saying, I’m willing to pay a premium for a quality business that has long-term pricing power. (Heinz scores great on both counts).  Buffett is willing to pay a premium for it, but this time the premium is less than it appears on the surface.