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The more things change: Heinz and the varieties of private equity buyout

6 March 2013 Editorial
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Subject to shareholder approval later this year, Warren Buffett's Berkshire Hathaway and Brazilian 3G Capital will acquire food giant Heinz for USD 28 billion. It is a private equity buyout with a twist - appropriate for a company which marketed the phrase "57 varieties" - but the impact on Heinz workers will be similar to what workers have long experienced in leveraged buyouts: intense pressure on employment and working conditions as investors seek to wring out the last drop of cash.

The 28 billion price tag includes USD 12 billion in new and assumed debt, a "mere" 42.8 percent of the purchase price (high enough to strain cash flow, but low by the historic standards of private equity megadeals which saw companies leveraged up to 80% and more). But the price includes USD 8 billion in Berkshire Hathaway preferred stock paying 9%, plus options to buy shares at an agreed price in the future. Treat this as hidden leverage and the debt ratio leaps skywards. In a twist on the dividend recapitalization ("recap") used by private equity funds to take on new debt after taking companies private, the recap is built in from the start - and of course Berkshire can exercise its options to claim even more dividends.

Heinz has been steadily raising its dividends yearly and even quarterly since the 2008 financial meltdown, while regularly celebrating increased profits with new layoffs and more outsourcing (see Heinz keeps workers in the dark and docks their pay). The additional debt, the 20% premium paid for the company, and Berkshire's guaranteed dividends increase the pressure.

Because Berkshire and 3G each put in USD 2 billion in equity, but only Berkshire gets the 8 billion in preferred stock, Buffet bought his piece of the company on very different terms than 3G. This prompted one Financial Times commentator to quip that Buffett had leveraged everyone but himself in this leveraged buyout. The truth is that Buffett and 3G together have leveraged the workers who make the products and the profits. It's the familiar formula in which all the risks are transferred to the workforce.

It is no comfort to workers that Buffett has said he will let 3G get on with the practical work of managing the company. 3G built a Brazilian brewer into global giant AB InBev through ruthless cost-cutting, and managed to squeeze even more cash out of Burger King when they took over from an earlier private equity consortium. "These guys get their hands really dirty in their businesses," commented an admiring banker interviewed on the Heinz deal by Forbes.

The more things change, the more things stay the same. Huge quantities of debt are the vehicle for acquiring companies and wringing out cash for investors at the expense of workers. This will not change until regulation is imposed which confronts the fundamental mechanism. In the meantime, Heinz workers need to organize their defense.