Did Buffett Overpay for Heinz (HNZ)?

February 14, 2013 11:47 AM EST
Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) shares are up about 1 percent Thursday following an earlier announcement that it would acquire H. J. Heinz (NYSE: HNZ) in a deal valued at $28 billion.

Under the deal, Berkshire will acquire Heinz for $72.50 per share, valuing Heinz at about 20.5 times expected earnings for fiscal 2013 (Heinz is currently in its fiscal third-quarter 2013 reporting period). Forward P/E is about 19 times. Recent price-to-book is also about 6.7 times.

Buffett's recent acquisition of Lubrizol, made in 2011 for about $9 billion, had a multiplier of about 12 times forward earnings.

Prior to Lubrizol, Buffett made the acquisition of Burlington Norther Santa Fe (BNSF) for about $26 billion. Burlington went under for about 18.2 times forward earnings.

Of course, there's more things to take into consideration, like growth rates and market presence. For Burlington, it has a lock-down on several key routes around the U.S. while Lubrizol had important partnerships and robust pipeline.

Heinz will be able to see growth as well with its products, which extend far beyond ketchup. But, as an example, put McDonald's into the equation. The staple of McDonald's is generally burgers (though, yes, they offer much more). As McDonald's makes larger expansion into emerging markets, more and more "burger-eating" consumers will be developed, potentially leading to larger ketchup sales as consumers look to make burgers at home.

That's a crude example, but paints a picture of what Buffett might be looking for in a deal. Long-term value versus short-term gains.

Heinz shares are up 19.9 percent Thursday.

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