In March of 2013, 3G Capital and Berkshire Hathaway closed on the acquisition of Heinz, privatizing this foodmaker for a total acquisition price (including debt) of around $28 billion. 3G’s cash contribution (the acquisition made significant use of debt) was just $4 billion.
Fast forward to 2015, and 3G Capital and Berkshire Hathaway made another transformative merger in the food industry. This time, the two companies arranged for a merger between publicly-traded Kraft Foods and privately-held H.J. Heinz to create publicly-traded Kraft Heinz (KHC).
Why is this significant?
Well, at the time of Kraft Heinz’s most recent proxy statement, 3G Capital owned 290,727,687 shares of Kraft Heinz, amounting to 23.8% of the company’s publicly-traded common shares, with a current market value of approximately $23.5 billion. For context, the Brazilian investment firm invested only $4 billion of cash into the deal when it bought Heinz, and an additional $5 billion when it merged with Kraft.
Think about that…3G has invested, in aggregate, just $9 billion into this consumer foods conglomerate and currently has a stake of $23.5 billion. 3G’s stake has more than doubled in a few short years, although this reflects the company’s significant use of debt to acquire the inaugural Heinz shares. In any case, the company appears to be doing something special.
With that in mind, this article will provide a detailed case study on 3G Capital’s into Heinz (and Kraft Heinz) to determine how the company was able to build such substantial shareholder value.
Who is 3G Capital
3G Capital is a Brazilian investment firm that is most well-known for its laser-like focus on cost-cutting at its investees and on retaining and developing the best managerial talent.
3G’s name comes from having three founders:
These three founders are the inspiration for the ‘3’ in 3G’s name and are the source of the company’s relentless focus on operational efficiency.
“Costs are like fingernails: they always have to be cut.” – Carlos Sicupira, one of 3G’s Founding Partners
3G Capital’s Founding Partners are pictured below.
Source: Financial Times
The first creation of these three business partners was the Brazilian investment bank Banco Guarantia. The “G” in Guarantia contributes the “G” in 3G Capital’s name. Guarantia was sold to Credit Suisse in the late 1990s.
As mentioned, one of 3G Capital’s most notable characteristics is the firm’s focus on cost control. The company makes avid use of a concept called zero-based budgeting to improve the operational performance of the companies it invests in.
Zero-based budgeting, or ZBB for short, is significantly different than normal budgeting procedures. In a traditional budgeting process, managers begin with the prior period’s budget, review financial performance and then make adjustments based on assumptions about future operating conditions. Only new expenses must be approved after closing the books on a completed reporting period.
Zero-based budgeting is different because managers will start with a blank budget for each time period. By building the budget from the ground up, managers are forced to justify every expense, which naturally improves operational efficiency over time.
Despite its effectiveness, zero-based budgeting is unpopular for two reasons.
First, it is highly disruptive. Entire departments can be eliminated after a zero-based budget analysis determines them to be a poor use of shareholder capital. In the past, these inefficient business units remained operational simply because they had always been there. The propensity for zero-based budgeting to cause layoffs and other slashes to corporate expenditures are the first reason why this managerial technique is not fully appreciated.
The second factor is up-front cost. Zero-based budgeting is highly expensive to implement in the beginning, resulting in large accounting charges that are later ‘paid back’ by recurring cost savings delivered by the leaner organizational structure.
