CITIC SECURITIES

FINTECH  CONSUMPTION EXCELLENCE

Project H Presentation
Deal Team ：
ZENG Mengcheng 1155092066
CHEN Tianhua 1155088786
Jai Paul Vasudeva 1155098245

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Agenda

Executive Summary
Industry Overview
Company Overview
Valuation & Deal Structure
Conclusion
Appendix

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 Exec Summary

Executive Summary
Industry summary
- U.S. economy revived slowly after 2008-2009 global financial crisis.
- U.S. food and beverage industry has been relatively resilient during the downturn.
- Competitors & competitive pattern ： Nestle, Danone, Kellogg & General Mills
- Drivers of future development: Technological advancement, trends in healthy diet, demands for convenient food, E-commerce/Online
shopping, population growth, market size expansion

Company overview
- Heinz manufacturers and markets a wide range of processed food products.
- Effect on stakeholders has seen to be positive due to mediocre operating performance over the years and citizens of Pittsburgh won't be
affected much in terms of employment. On the contrary, employees will have the challenge to sustain in the company.
- Kraft and Heinz will be as big as $100 billion after the merger if everything stays. On top of which it is projected to be third largest food
company in North America.

Valuation
• Discounted Cash Flow Model (DCF)
- We concluded the fair equity value at $19,245 million, the implied share price is $59.58. The acquisition premium of the deal is 21.68%.
- In the sensitivity analysis, implied value per share at a range of $57.79-$66.48.
• Compatible companies & Precedent transactions
- The comps are trading at 1.5x P/Sales, 15.0x P/E and 9.6x EV/EBITDA.
- The trading comps implied the corresponding equity value at a range of $15.4 bn-$17.3 bn, with the implied per share value range of $47.69-
$53.54, the premium over implied share value range $47.69-$53.54 is 35.41%-52.02%.
- The mean and median EV/Revenue ratios of transactions are 2.9x and 1.9x, with corresponding implied per share value range within $58.18-
$88.80

Deal structure
- We recommend 3C & Berkshire to use all-cash method to finish the acquisition

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Agenda

Executive Summary
Industry Overview
Company Overview
Valuation & Deal Structure
Conclusion
Appendix

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 Industry Overview

Market conditions

1. U.S. economy revived slowly after

2008-2009 global financial crisis.

2. U.S. food and beverage industry has

been relatively resilient during the
downturn.

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 Industry Overview

Market conditions

1. U.S. food and beverage retail sales increased steadily

during financial crisis period while backed to normal in
2010.

2. YoY growth rate of Danone was the highest while of

Nestle was the lowest in 2011.

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 Industry Overview

Competitors

Nestle
No.1 global Danone
Food company operates: Kellogg General Mills
Manufacturer and Leading manufacturer
food and Essential Dairy and Plant-
Basic marketer of ready-to-eat and marketer of
beverage Based Products, Early Life
information cereal and convenience branded consumer
company by Nutrition, Medical
foods foods
sales Nutrition and Waters.
Headquarter
Vevey, CH Paris, FR Battle Creek, US Minneapolis, US
location
Coffee; bottled Refrigerated yogurt;
Cookies; crackers;
Principal water; frozen Bottled water; baby food; ready-to-serve soup;
frozen waffles; cereal
products pizza; baby coffee; dairy products dry dinner; frozen
bars; veggie foods
food vegetables
Häagen-Dazs; Betty
Nespresso; Eggo; Gardenburger;
Main brands Dannon; Evian; AQUA Crocker; Wanchai
Nescafe; Kit Kat Pringles
Ferry

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 Industry Overview

Drivers of future development

Technological advancement
- Artificial intelligence: automating processes improve productivity & sustainability
- Real-time data stored in block-chain network
- Smart labelling: packaging labels which can be scanned by sensors or smartphone
- Service robots: used for food processing to prevent contamination in the food supply.

Trends in healthy diet

- Plant-based foods: meat – and dairy – free diets
- Organic farming: naturally grown fruits, vegetables helps build consumers’ immune system. 

Demands for convenient food

- Constrained by labor-force participation, have less time to spend on preparing food and cleanup
- Prices of convenience foods may have fallen relative to their less convenient counterparts
- Advertising which is more visible for the convenient food may stimulate demand

E-commerce / Online shopping

- Option of reading other people’s reviews
- Due to the outbreak of COVID-19, most people are now working from home and in self-quarantine
- Increase in smartphone users and internet penetration

Population growth, market size expansion

- Population has increased by 19.5 million or 6.3% since 2010. The average annual growth between July
2010 and July 2019 was 0.66%.

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Agenda

Executive Summary
Industry Overview
Company Overview
Valuation & Deal Structure
Conclusion
Appendix

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 Company Overview

Business Overview

Product & Business Lines Key Management

- Heinz manufacturers and markets a wide range of Name Positions & Offices
processed food products.
William R. Johnson Chairman, President, and Chief
- The company’s products are processed by sterilization, Executive Officer
blending, fermentation, pasteurization, homogenization,
chilling, freezing, pickling, drying, freeze drying, baking or Theodore Bobby Executive Vice President &
extruding, then labelled and cased for market. General Counsel

- It offers a broad range of products under Ketchup and David Moran Executive Vice President, Region
sauces, Meals and snacks, Infant/ Nutrition and Other. Officer

- The company classified its operations into five segments, C. O’Hara Executive Vice President, Region
namely, North American Consumer Products, the US Officer
Foodservice, Europe, Asia Pacific, and Rest of World.
Michael Mullen Vice President, Director Global
- The Company manufactures (and contracts for the Corporate Affairs
manufacture of) its products from a wide variety of raw
food materials.
Arthur Winkleback Executive Vice President, Chief
- The Company’s products are sold through its own sales Financial Officer
organizations and through independent organizations.

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 Company Overview

Effect on Stakeholders

• Heinz Shareholders: Heinz  had a very average operating performance before the merger, thus not benefitting the
shareholders too much. Therefore, external investment into the company only seemed advantageous. The
operational reform participated by investors, the successful sale of company stock and the cash out resulted in a
positive standing of the shareholders.

• Heinz Management: The merger did not undergo a major Management change, but Bernardo Hees transitioned
from a Heinz family member to the CEO of the company. This was an extremely positive change. The company
would make headway under the new operation management mode. William Johnson, the former CEO was to have
a hefty ”golden parachute” of $56 million in the event that he is relieved of his duties as the CEO after the merger
and $ 40 million if he quit under the regulatory fillings but under vote by shareholders. Even for a CEO resignation,
it was a lucrative exit package. Thus the management’s positive can be said to be a positive one.

• Heinz Employees: The acquisition would provide employees with opportunities but would also pose challenges.
Able employees would not be laid off and might even be promoted but incompetent employees would lose their
jobs. Thus, the employees was a conflicting one.

• Citizens of Pittsburgh: The company would have its headquarters in Pittsburgh, guaranteeing employment to the
locals and making an accession to the tax revenue which would be beneficial to local residents. Thus, good
performance of the merger would result in nothing but a positive consequence for the citizens of Pittsburgh.

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 Company Overview

Financial Overview

Commentary
• Forecasts provided by Company Management
• Eliminates intersegment transactions

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 Company Overview

Core Competency

• Warren Buffett, chairman and CEO of Berkshire Hathaway, said, ""Heinz has strong, sustainable growth potential
based on high quality standards, continuous innovation, excellent management and great tasting products.

• Ketchups and sauces accounted for $1.32 billion of revenue in the last quarter while most companies in food universe
had a revenue in billions.

• For the year ended Oct. 28, the company reported $11.6 billion in revenue and $1 billion in profit. It generates the
largest portion of its sales in Europe, but its Asian markets are growing quickly.

• Heinz's returns on invested capital have hovered around 6-11% over the last decade, which is better than the
company's cost of capital highlighting the company's durable competitive advantages. The company generates
consistent revenue from around the world

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Agenda

Executive Summary
Industry Overview
Company Overview
Valuation & Deal Structure
Conclusion
Appendix

14

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 Valuation & Deal Structure

DCF Model

- We forecasted financial performance of Heinz in the next 5 years, with the revenue growth rate at 1.3%
- We assumed most of other columns develop with the same rate or as a fixed proportion of total revenue
- As the terminal value occupying 78.5% of enterprise value, the total enterprise value of Heinz is $22,359 million, with the discount
rate at 6.5%.

Source: Case materials

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 Valuation & Deal Structure

DCF Acquisition Premium & Sensitivity Analysis

Acquisition Premium
- As the enterprise value from DCF
model is $22,359 million, we
concluded the fair equity value at
$19,245 million

- The total diluted shares

outstanding are 323 million, so the
implied share price is $59.58

- As the offer price of 3C capital and

Berkshire is $72.50, while the
implied share price is $59.58. The
acquisition premium of the deal is
21.68%.
Sensitivity Analysis

• We changed the discount rate

from 5.9%-7.1% and terminal
value growth rate from 0.9%-1.7%
• Implied value per share at a range
of $57.79-$66.48

Source: Case materials

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 Valuation & Deal Structure

Trading comps

• We selected the comparable companies listed in the US capital market with main business segments in food industry, there are 10
comparable companies in total.
• We selected P/Sales, P/E and EV/EBITDA as the multiples to evaluate the revenue, profitability and cash flow simultaneously.
• We believe that Kellogg is the closest peer to Heinz by comparing the ratios.
• Compared with comparable companies, Heinz has higher P/E ratio and EV/EBITDA ratio
• The median of P/Sales, P/E and EV/EBITDA are 1.5x, 15.0x and 9.6x

Closest peers
to Heinz

Implied high
profitability
than peers

Source: Case materials

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 Valuation & Deal Structure

Trading comps
• The comps are trading at 1.5x P/Sales, 15.0x P/E and 9.6x EV/EBITDA
• The trading comps implied the corresponding equity value at a range of $15.4 bn-$17.3 bn, with the implied per share value range
of $47.69-$53.54
• As the offer price is $72.50, the premium over implied share value range $47.69-$53.54 is 35.41%-52.02%

Source: Case materials

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 Valuation & Deal Structure

Transaction comps
• We selected the transactions happened during the last 5 years, with targets’ EV over $2 billion and positive EBITDA.
• Most of listed transaction targets have similar EV/Revenue ratio, we believe EV/Revenue is the most related ratio.
• The mean and median EV/Revenue ratios are 2.9x and 1.9x, with corresponding implied per share value range within $58.18-
$88.80, while the range lies in $28.83-$29.31 for EV/EBITDA and $205.61-247.58 for EV/Net Income ratio.

Source: Case materials

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 Valuation & Deal Structure

Valuation Summary
• According to the valuation outcome of DCF model, comparable companies and precedent transactions, we find that most of the
implied value per share from median to 75th percentile are at a range of $47.69-$61.45
• The current share price on Feb 13, 2013 is $60.5, which is on the top of most valuation ranges.
• From the football field chart, the intersection range of several valuation methods is $55-$60, which we believe is the fair value per
share of Heinz.

Heinz Valuation Summary-Range of implied share prices

Precedent Transactions $58.18

EV/LTM Revenue $47.47 $133.13

Comparable Companies $51.50

2012 EV/EBITDA $48.31 $60.41

25th to Median
$47.69
2012 P/E $43.24 $55.64 Current Share price: $60.5 on Feb 13, 2013
Offer Price:$72.50
$53.54
2012 P/Sales $46.40 $60.68

DCF Model $57.79 $61.45

$20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00

Source: Case materials

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 Valuation & Deal Structure

Deal Structure

Deal Structure: We recommend 3C & Berkshire to use all-cash method to finish the acquisition

• Cash vs Stock
– In cash transactions, acquiring shareholders take on the entire risk that the expected synergy value embedded
in the acquisition premium will not materialize.
– In stock transactions, that risk is shared with selling shareholders.

• Benefits of all-cash acquisition

– For a buyer in an all-cash purchase usually involves the ability to get a better deal on the price.
– Sellers are often open to negotiating a better price if they will receive cash upfront without any delays or
possible financing issues.
– The buyer also does not have to be concerned with the extra cost of interest from borrowing.
– As private equity firms, 3C capital & Berkshire have no financing risk
– In a cash deal, the roles of the two parties are clear-cut, and the exchange of money for shares completes a
simple transfer of ownership

• Drawbacks of all-cash acquisition

– Shareholders will be on the hook to pay potential capital gains taxes — which are likely to climb from their
current levels
– For all-stock transactions, these taxes for shareholders would likely be deferred.

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Conclusion
Position of various Stakeholders Acquisition Premium

• After less contributions towards the shareholders, • The acquisition premium was 21.68%
they were pacified with the decision of merging.
• The average retail merger in 2012 was nearly 33%
• Management and employees on the other hand faced while in 2013 it was 25%. Comparatively, the
a problem of competency in the company. But as the premium the reasonable.
firm grows, growth prospect for each individual
grows. • Value added for existing shareholders and positive
valuation for the group also makes the acquisition
• Having the same headquarters, Pittsburgh are a premium reasonable for the stakeholders.
better position with more openings in the same area.

Valuation Deal Structure

• Using DCF, we concluded the fair equity value at • We recommend 3C & Berkshire to use all-cash
$19,245 million, the implied share price is $59.58. The method to finish the acquisition
acquisition premium of the deal is 21.68%.
• Cash deals are simple but creates immediate tax
• Using trading comps, the implied per share value is liability.
within range of $47.69-$53.54, the premium is 35.41%-
52.02%. • In a cash deal, the roles of the two parties are clear-
cut, and the exchange of money for shares completes
• By combining the valuation methods, we concluded a simple transfer of ownership
the fair value per share is within $55-$60, which
indicates a premium of 20.83%-31.82%
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References
• https://www.auspack.com.au/food-beverages-the-four-industry-drivers/

• https://www.statista.com/outlook/40080000/109/convenience-food/united-states

• https://www.census.gov/library/stories/2020/04/nations-population-growth-slowed-this-decade.html

• https://www.ers.usda.gov/publications/pub-details/?pubid=80653

• https://www.sec.gov/Archives/edgar/data/46640/000004664012000012/hnz10k42912.htm

• https://search.proquest.com/docview/1850338474/C3E5EC8E9BD5450CPQ/2?accountid=10371

• https://www.businessinsider.com/heinz-ceo-gets-historic-golden-parachute-2013-3

• https://www.casehero.com/h-j-heinz-ma/

• https://www.cnbc.com/id/100442835

• https://seekingalpha.com/article/1201241-4-reasons-why-the-berkshire-3g-deal-for-heinz-is-a-home-run

• https://dealbook.nytimes.com/2013/02/14/berkshire-and-3g-capital-to-buy-heinz-for-23-billion/

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