END OF CHAPTER CASE STUDY: BERKSHIRE HATHAWAY
AND 3G BUY AMERICAN FOOD ICON HEINZ
Case Study Objectives: To Illustrate
• Form of payment, form of acquisition, acquisition vehicle, and postclosing organizations
• How complex LBO structures are organized and financed.
In a departure from its traditional deal making strategy, Berkshire Hathaway (Berkshire), the
giant conglomerate run by Warren Buffett, announced on February 14, 2013, that it would buy
food giant H.J. Heinz (Heinz) for $23 billion or $72.50 per share in cash. Including assumed debt,
the deal is valued at $28 billion. Traditionally, Berkshire had shown a preference for buying
Investors greeted the news enthusiastically boosting Heinz’s stock price by nearly 20% to the
offer price and Berkshire’s class A common stock price by nearly 1% to $148,691 a share.
Unlike prior transactions, Berkshire teamed with 3G Capital Management (3G), a Brazilianbacked
investment firm that owns a majority stake in Burger King, a company whose business is
complementary to Heinz, and interests in other food and beverage companies. Heinz’s headquarters
will remain in Pittsburgh, its home for more than 120 years. The major attraction to
Berkshire is the extremely well-known Heinz brand and the opportunity to use Heinz as a
platform for making additional acquisitions in the global food industry. Berkshire is adding
another widely recognized brand to his portfolio which already contains Dairy Queen and Fruit
of the Loom. The strong Heinz brand gives it the ability to raise prices.
The deal is intended to assist Heinz in growing globally. By taking the firm private, Heinz
will have greater flexibility in decision making not having to worry about quarterly earnings.
Currently, about two-thirds of the firm’s total annual revenue comes from outside the United
States. Heinz earned $923 million on sales of $11.65 billion in fiscal 2013.
At 20 times 2013 current earnings, the deal seems a bit pricey when compared to price to earnings
ratios for comparable firms (Table 13.4). The risks to the deal are significant. Heinz will
have well over $10 billion in debt, compared to $5 billion now. Before the deal, Moody’s
Investors Service rated Heinz just two notches beyond junk. If future operating performance
falters, the firm could be subject to a credit rating downgrade. The need to pay a 9% preferred
stock dividend will also erode cash flow. 3G will have operational responsibility for Heinz.
Heinz may be used as a platform for making other acquisitions.
Risk to existing bondholders is that 1 day they own an investment grade firm with a modest
amount of debt and the next day they own a highly leveraged firm facing a potential downgrade
to junk bond status. On the announcement date, prices of existing Heinz triple B rated bonds fell
by over two cents on the dollar, while the cost to ensure such debt (credit default swaps) soared
by over 25% to a new high.
The structure of the deal is described in Figure 13.3. H.J. Heinz Company, a Pennsylvania
Corporation, entered into a definitive merger agreement with Hawk Acquisition Holding
Corporation (Parent), a Delaware corporation, and Hawk Acquisition Sub (Merger Sub), Inc., a
Pennsylvania corporation and wholly owned subsidiary of Parent. The agreement called for
Merger Sub to merge with Heinz, with Heinz surviving as a wholly owned subsidiary of Parent.
Berkshire and 3G acquired one-half of the common stock of Parent for $4.12 billion each, with
Berkshire also purchasing $8 billion in 9% preferred stock issued by Parent, bringing the total
cash injection to $18.24 billion. The preferred stock has an $8 billion liquidation preference (i.e.,
assurance that holders are paid before common shareholders), pays and accrues a 9% dividend,
and is redeemable at the request of the Parent or Berkshire under certain circumstances. The use
of preferred stock has been a hallmark of Berkshire deals and has often included warrants to
buy common stock.
Parent used the $18.24 billion cash injection from Berkshire and 3G (i.e., $14.12 from
Berkshire1$4.12 from 3G) to acquire the common shares of Merger Sub. J.P. Morgan and Wells
Fargo provided $14.1 billion of new debt financing to Merger Sub. The debt financing consisted of $8.5 billion in dollar-denominated senior secured term loans, $2.0 billion of Euro/British
Pounds senior secured term loans, a $1.5 billion senior secured revolving loan facility, and a $2.1
billion second lien bridge loan facility. Total sources of funds equal $32.34 billion, consisting of
$18.24 in equity plus $14.1 billion in debt financing.
The deal does not contain a go shop provision, which allows the target to seek other bids
once they have reached agreement with the initial bidder in exchange for a termination fee to be
paid to the initial bidder if the target chooses to sell to another firm. Go shop provisions may be
used since they provide a target’s board with the assurance that it got the best deal; for firms
incorporated in Delaware, the go shop provision helps target argue that they satisfied the socalled
Revlon Duties, which require a board to get the highest price reasonably available for the
firm. While Heinz did not have such a go shop provision, if another bidder buys Heinz, it will
have to pay a termination fee of $750 million, plus $25 million in expenses. If Berkshire and 3G
cannot close the deal they must pay Heinz $1.4 billion before they can walk away.
Heinz may not have negotiated a go shop provision which is common in firms seeking to
protect their shareholder interests because it is incorporated in Pennsylvania. Pennsylvania
corporate law is intended to give complete latitude to boards in deciding whether to accept or
reject takeover offers because it does not have to consider shareholders’ interests as the dominant
determinant of the appropriateness of the deal (unlike Delaware). Instead, the directors can base
their decision on interest of employees, suppliers, customers and creditors and communities.
This may explain why Berkshire and 3G have agreed to have Heinz’s headquarters remain in
Pittsburgh, keep the firm’s name, and preserve the firm’s charitable commitments. Firms incorporated
in Delaware may be subject to greater pressure to negotiate go shop arrangements
because Delaware corporate law requires the target’s board to get the highest price for its
1. Identify the form of payment, form of acquisition, acquisition vehicle, and postclosing
organization? Speculate why each may have been used.
2. How was ownership transferred in this deal? Speculate as to why this structure may have
3. Describe the motivation for Berkshire and 3G to buy Heinz.
4. How will the investors be able to recover the 20% purchase price premium? Explain your
5. Do you believe that Heinz is a good candidate for an LBO? Explain your answer.
6. What do you believe was the purpose of the $1.5 billion senior secured revolving loan facility,
and the $2.1 billion second lien bridge loan facility as part of the deal financing package?
7. Why do you believe Berkshire Hathaway wanted to receive preferred rather than common
stock in exchange for its investing $8 billion? Be specific.
END OF CHAPTER CASE STUDY: THERMO FISHER ACQUIRES
Case Study Objectives: To Illustrate How Acquirers Utilize Financial Models To
• Evaluate the impact of a range of offer prices for the target firm, including what constitutes
the “maximum price”
• Determine which financing structures are consistent with maintaining or achieving a desired
• Investigate the implications of different payment structures (form and composition of the
• Identify the impact of changes in operating assumptions such as different revenue growth rates
or the amount and timing of synergy.
Almost 9 months after reaching an agreement to combine their operations, the merger
between Life Technologies Corporation (Life Tech) and Thermo Fisher Scientific Inc. (Thermo
Fisher) was completed on January 14, 2014. Thermo Fisher is the largest provider by market
value of analytical instruments, equipment, reagents and consumables, software, and services
for scientific research, analysis, discovery, and diagnostics applications. Life Tech is the second
largest by market value provider of similar products and services to the scientific research and
genetics analysis communities. While the fanfare surrounding the closing echoed sentiments
similar to those expressed when the deal was first announced, the hard work of integrating
the two firms was just beginning. What led to this moment illustrates the power of financial
models. Life Tech had been evaluating strategic options for the firm since mid-2012, concluding that
putting itself up for sale would be the best way to maximize shareholder value (see Case Study
11 titled “Life Tech Undertakes a Strategic Review” for more detail.). After entering into discussions
with Thermo Fisher in late 2012, the two firms announced jointly on April 15, 2013, that
they had reached an agreement to merge. Exuding the usual optimism accompanying such pronouncements,
Mark N. Casper, president and chief executive officer of Thermo Fisher stated
“We are extremely excited about this transaction, because it creates the ultimate partner for our
customers and significant value for our shareholders. . . enhancing all three elements of our
growth strategy: technological innovation, a unique customer value proposition, and expansion
in emerging markets.” Expressing similar confidence, Greg T. Lucier, chairman and chief executive
officer of Life Tech noted “This transaction brings together two companies intent on accelerating
innovation for our customers and achieving greater success in a highly competitive global
This case study utilizes the publicly announced terms of the merger of Life Tech into a
wholly owned subsidiary of Thermo Fisher, with Life Tech surviving. The terms were used to
develop pro forma financial statements for the combined firms. These statements are viewed as
a “base case.”42
The financial model discussed in this chapter is used to show how changes in key deal terms
and financing structures impacted the base case scenario. The discussion questions following the
case address how the maximum offer price for Life Tech could be determined, what the impact
of an all-debt or all-equity deal would have on the combined firms’ financial statements, and the
implications of failing to achieve synergy targets. Such scenarios represent the limits of the range
within which the appropriate capital structure could fall and could have been part of Thermo
Fisher’s predeal evaluation. As announced by Thermo Fisher, the appropriate capital structure is
that which maintains an investment grade credit rating following the merger. Thermo Fisher’s
senior management could have tested various capital structures between the two extremes of alldebt
and all-equity before reaching agreement on the form of payment with which they were
most comfortable. Therefore, the form of payment and how the deal was financed were instrumental
to the deal getting done.
Payment and Financing Terms
According to the terms of the deal, Thermo Fisher acquired all of Life Tech’s common shares
outstanding, including all vested and unvested outstanding stock options, at a price of $76 per
share in cash, with the Life Tech shares canceled at closing. The actual purchase price consisted
of an equity consideration (i.e., what was paid for Life Tech’s shares) of $13.6 billion plus the
assumption of $2.2 billion of Life Tech’s outstanding debt.
The purchase price was funded by a combination of new debt, equity, and cash on Thermo
Fisher’s balance sheet. Thermo Fisher executed a commitment letter, dated April 14, 2013, with
JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and Barclays Bank PLC that provided
a commitment for a $12.5 billion 364-day unsecured bridge loan facility. The facility enabled the
firm to pay for much of the purchase price before arranging permanent financing by issuing new
debt and equity in late 2013.
Maintaining an Investment Grade Credit Rating
In an effort to retain an investment grade credit rating43 by limiting the amount of new
borrowing,44 Thermo Fisher issued new common equity and equity linked securities such
as convertible debt and convertible preferred totaling $3.25 billion to finance about one-fourth
of the $13.6 billion equity consideration. The $3.25 billion consisted of $2.2 billion of common
stock sold in connection with its public offering prior to closing, and up to a maximum
of $1.05 billion of additional equity to be issued at a later date in the form of convertible
debt and preferred shares. Thermo Fisher financed the remaining $10.35 billion of the
purchase price with the proceeds of subsequent borrowings and $1 billion in cash on its
Thermo Fisher and Life Tech compete in the medical laboratory and research industry. The
average debt-to-total capital ratio for firms in this industry is 44.6%,45 and the average interest
coverage ratio is 4.0.46 Thermo Fisher expects that available free cash flow will allow for a rapid
reduction in its debt. The firm expects to be below the industry average debt-to-total capital ratio
by the end of the third full year following closing and about 12 percentage points below it within
5 years after closing. The firm’s interest coverage ratio is expected to be equal to the industry
average by the second year and well above it by the third year and beyond. These publicly stated
goals established metrics shareholders and analysts could use to track the Thermo Fisher’s progress
in integrating Life Tech.
Consistent with management’s commitment to only make deals that immediately increase
earnings per share, Thermo Fisher expects the deal to increase adjusted earnings per share during
the first full year of operation by as much as $0.70_$1.00 per share. Adjusted earnings per
share exclude the impact on earnings of transaction-related expenses and expenses incurred in
integrating the two businesses. Including these expenses in the calculation of EPS is expected to
result in a $(0.16) per share during the first full year following closing, but excluding these
expenses will result in $0.99 per share.47
Quantifying Anticipated Synergy
Realizing synergy on a timely basis would be critical for Thermo Fisher to realize its publicly
announced goal that the deal would be accretive on an adjusted earnings per share basis at the
end of the first full year of operation. Synergies anticipated by Thermo Fisher include the realization
of additional gross margin of $75 million and the realization of $10 million in SG&A savings
in 2014, the first full year following closing. Gross margin improvement and SG&A savings are
projected to grow to $225 million and $25 million, respectively, by 2016, and to be sustained at
these levels indefinitely. Most of the cost savings are expected to come from combining global
infrastructure operations. Revenue-related synergy is expected to reach $25 million annually
from cross-selling each firm’s products into the other’s customer base by the third year, up from
$5 million in the first year.
Mark Fisher, CEO of Thermo Fisher knew that the key to unlocking value for shareholders
once the deal closed was realizing the anticipated synergy on a timely basis. However, rationalizing
facilities by reducing redundant staff, improving gross margins, and increasing revenue was fraught with risk. Eliminating staff had to be done in such a way as not to demoralize employees
retained by the firm and increasing revenue could only be achieved if the loss of existing
customers due to the attrition that often follows M&As could be kept to a minimum. He also
knew to expect the unexpected, despite having completed what he believed was an extensive
Having been through postmerger integrations before, he knew first hand the challenges
accompanying these types of activities. At the time of closing, many questions remained.
What if synergy were not realized as quickly and in the amount expected? What if expenses
and capital outlays would be required in excess of what had been anticipated? How patient
would shareholders be if the projected impact on earnings per share, a performance metric
widely followed by investors and Wall Street Analysts alike, was not realized? Only time
Answer questions 1_4 using as the base case the firm valuation and deal structure data in the
Microsoft Excel model available on the companion site to this book entitled Thermo Fisher
Acquires Life Technologies Financial Model. Please see the Chapter Overview section of this chapter
for the site’s internet address. Assume that the base case assumptions were those used by
Thermo Fisher in its merger with Life Tech. The base case reflects the input data described in
this case study. To answer each question you must change selected input data in the base case,
which will change significantly the base case projections. After answering a specific question, either
undo the changes made or close the model and do not save the model results. This will cause the model
to revert back to the base case. In this way, it will be possible to analyze each question in terms
of how it is different from the base case.
1. Thermo Fisher paid $76 per share for each outstanding share of Life Tech. What is the
maximum offer price Thermo Fisher could have made without ceding all of the synergy value
to Life Tech shareholders? (Hint: Using the Transaction Summary Worksheet, increase the
offer price until the NPV in the section entitled Valuation turns negative.) Why does the offer
price at which NPV turns negative represent the maximum offer price for Life Tech? Undo
changes to the model before answering subsequent questions.
2. Thermo Fisher designed a capital structure for financing the deal that would retain
its investment grade credit rating. To do so, it targeted a debt-to-total capital and
interest coverage ratio consistent with the industry average for these credit ratios.
What is the potential impact on Thermo Fisher’s ability to retain an investment grade
credit rating if it had financed the takeover using 100% senior debt? Explain your
answer. (Hint: In the Sources and Uses section of the Acquirer Transaction Summary
Worksheet, set excess cash, new common shares issued, and convertible preferred shares
to zero. Senior debt will automatically increase to 100% of the equity consideration plus
transaction expenses.48) Undo changes to the model before answering subsequent
3. Assuming Thermo Fisher would have been able to purchase the firm in a share for share
exchange, what would have happened to the EPS in the first year? Explain your answer.
(Hint: In the form of payment section of the Acquirer Transaction Summary Worksheet, set the percentage of the payment denoted by “% Stock” to 100%. In the Sources and Uses
section, set excess cash, new common shares issued, and convertible preferred shares to zero.)
Undo changes made to the model before answering the remaining question.
4. Mark Fisher, CEO of Thermo Fisher, asked rhetorically what if synergy were not realized as
quickly and in the amount expected. How patient would shareholders be if the projected
impact on earnings per share was not realized? Assume that the integration effort is far more
challenging than anticipated and that only one-fourth of the expected SG&A savings, margin
improvement, and revenue synergy are realized. Furthermore, assume that actual integration
expenses (shown on Newco’s Assumptions Worksheet) due to the unanticipated need to
upgrade and colocate research and development facilities and to transfer hundreds of
staff are $150 million in 2014, $150 million in 2015, $100 million in 2016, and $50 million in
2017. The model output resulting from these assumption changes is called the Impaired
What is the impact on Thermo Fisher’s earning per share (including Life Tech) and the
NPV of the combined firms? Compare the difference between the model “Base Case” and
the model output from the “Impaired Integration Case” resulting from making the changes
indicated in this question. (Hint: In the Synergy Section of the Acquirer (Thermo Fisher)
Worksheet, reduce the synergy inputs for each year between 2014 and 2016 by 75%
and allow them to remain at those levels through 2018. On the Newco Assumptions
Worksheet, change the integration expense figures to reflect the new numbers for 2014,
2015, 2016, and 2017.)