95 premium needed in order to gain control of Campbell for then to analyze the potential sourcing of capital, strategic implications of active ownership and a return analysis.
LBO Analysis
96 EV/EBITDA of around 14x. By leveraging up, 3G and Berkshire didn’t put up more than $4.25 billion of equity each, Berkshire however also invested another $8 billion in preferred stock (Kraft Heinz, 2013).
In 2015, 3G Capital and Berkshire Hathaway teamed up to create a new company through the merger of H.J.
Heinz Co. and The Kraft Foods Group. Post-merger the Heinz shareholders, with the majority made up of 3G Capital and Berkshire Hathaway, ended up holding a 51% stake in the newly formed company, called The Kraft Heinz Company. The remaining 49% went to shareholders of Kraft, which were also given a one-time cash dividend of $16.50 per share. The cost of this $10 billion dividend, were borne by 3G Capital and Berkshire Hathaway, and equals around a 20% premium compared to the share price at the time. The EV/EBITDA was above 17x which is considered high, the merger however did represent an array of synergy opportunities which likely justified the final deal value.
9.1.1.2 Hillshire Brands acquired by Tyson Foods
Hillshire Brands common stock was delisted and ceased trading on the NYSE and Chicago Stock Exchange (CSE) on August 28, 2014, as the company signed a $7.7 billion deal to be acquired by Tyson Food. Tyson won a long drawn-out bidding war for the company with its offer of $63 a share, just north of a 70% premium to Hillshire’s valuation before the bidding process began. The EV/EBITDA multiple of this transaction was more than 18x, which is very high. The significant acquisition premium can in large be explained by the secretive nature of the auction process, which resulted in Tyson’s offer coming in hundreds of millions of dollars over the next-best offer, made by Pilgrim's Pride Corp., part of Brazilian meatpacking giant JBS SA. Through the merger however, cost cuts as a result of synergies are expected to be more than $500 million, by fiscal year 2017. The merger has also secured Tyson a long-lusted branded meat portfolio, which in general carries higher profit margins than processed meat sold to restaurants etc., which previously accounted for the majority of Tyson’s sales (The Wall Street Journal, 2014). Tyson’s strategy pre- and post-merger has been to focus its growth on prepared and branded food, and the merger has thus functioned as a springboard, helping Tyson accomplish something that otherwise would have taken them years. The acquisition therefore holds large value for Tyson through cost- and distribution- synergies something that explains their willingness to pay such a high premium for Hillshire brands.
9.1.2 The effect of block holders and family interest
The fact that the Dorrance family holds a large shareholding of Campbell complicates a potential transaction because one would have to take into account this special investor group, which at the same time is fragmented (eleven family members). Furthermore, family ownership may not be fully rational, but rather hold emotional attachment to its investments compared to other investors. This may make it difficult to acquire Campbell, as block holders such as this are less likely to want to sell at the right price, compared to other investors.
In the scenario where the Dorrance family does not want to sell, a scenario where they partake as part of the acquiring holding company could be explored. The authors see several similarities with such a model and the one pursued by 3G Capital when acquiring Heinz. The Heinz acquisition was led by two investors with different agendas, Berkshire Hathaway which is known for long-term positioning without interfering with daily operations,
97 and 3G Capital which puts strong emphasize on cost management and margin improvement. A partnership between the Dorrance family and a private equity firm would in the same respect bring together a long-term investor with a more “cut throat” investor. The authors believe that such a partnership is possible but also requires that Campbell’s historical value be respected. The main problem for Campbell has been top line growth, the new buyers should therefore have strong plans for increasing revenues in order to convince the Dorrance’s that a new investor partnership is the right move. Another potential aspect is the potential for cost savings, 3G Capital increased the EBITDA margin from 18% to 26% in less than 2 years.
Research on family ownership finds that family ownership holds a positive effect on firm value consistent with a competitive advantage. Families also often act as stewards of the family legacy and business and hold a profit horizon that is long term (Villalonga & Amit, 2009). Some research also points to controlling parties, such as families, as more prone to tunnel capital out of the firm, thereby benefitting some shareholders on the expense of other. Whether this could be the case at Campbell is very difficult to assess, some of the Dorrance’s do hold positions in the company. Villalonga & Amit (2009) find that such tunneling is more likley to occur at the operational level, prior to EBITDA in a firm’s income statement. This could for example be the use of company assets by the Dorrance’s who hold board member position at Campbell for personal use at the firm’s expense.
This is however a practice that is incredible difficult to see from outside of the firm through publicly avilable information.
Another aspect is that the ownership is spread across several family members, and only together may they actually hold majority. The fact that three board members are descendants from John T. Dorrance, indicate that this is the case, but if one goes back to the 1990s the family was in conflict because some wanted to sell while others wanted to hold and protect the family legacy (The LA Times, 1989). The right offer could therefore spark new tension and the authors find it unlikely that all family members would want to rollover their equity into the deal.
A buy-out approach of Campbell should therefore be open to the possibility of uproar from the Dorrance family, and without acquiring some of their shares a buyout becomes extremely difficult. An example approach on how please the family shareholders, could be through including them in the deal and paying a special dividend equaling the premium offered to other shareholders (like Heinz did with Kraft Foods). The right strategic partner for the Dorrance family could help Campbell become truly global company with a more globally diversified sales distribution.
9.1.3 Applied Acquisition Premium
The Heinz acquisition was done at a 20% premium and the merger with Kraft Foods was done at a special dividend of around 20%. Given that both of these transactions represents highly comparable firms to Campbell, a premium of 20% is applied to the market equity valuation as of May 10th 2016. The case of Hillshire shows how far some buyers will stretch to gain potential synergies with a target. In the case of this thesis, where the potential buyer is assumed to be a financial sponsor and not a strategic buyer, the synergy effect plays a small, if not any role at all.
A large premium above Campbell’s current valuation would make such a deal un-profitable. On the other hand, it
LBO Analysis
98 utilizes potential arbitrage between equity- and debt- capital markets. With target IRR of most private equity firms being around 20% the LBO analysis will show what room exists for a premium. The Heinz acquisition which was done at 14x EV/EBITDA has so far yielded an implied IRR of 38%, after merging with Kraft, so with a target of 20% as a bare minimum there was clearly room for a premium above 20%. This is something that is further tested in the sensitivity analysis in section 9.6. The base case LBO scenario hence applies a 20% premium, valuing the company at around $27.1 billion.