Buds, Burgers, Ketchup (with extra ketchup) – the world’s most interesting billionaire
Jorge Lemann has been touted as the world’s most interesting billionaire. Not only did he just purchase Heinz in 2013 (along with Warren Buffett), he also purchased Burger King in 2010, and after the $52 billion takeover of Anheuser-Busch in 2008, Budweiser beer.
And if that is not interesting enough, Lemann, the son of a Swiss businessman who emigrated to Brazil, was a tennis pro before he moved into finance. He was Brazil’s top-ranked player five times from 1960 to 1972, according to the Brazilian Tennis Federation.
So it doesn’t seem Lemann grew up on Burgers and Buds, in fact People who know Lemann say he personally avoids the products he now peddles. That has not stopped him from going “all in” on his bet that a good chunk of the world will keep up their love affair with his products.
So how did Hee’s finance the Heinz acquisitions? And what does Berkshire and 3G Capital intend to do with the Heinz acquisition? Here is an excerpt from the Berkshire Hathaway 2013 Annual Report:
With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in future acquisitions of size. Here, we teamed up with investors at 3G Capital, a firm led by my friend, Jorge Paulo Lemann. His talented associates – Bernardo Hees, Heinz’s new CEO, and Alex Behring, its Chairman – are responsible for operations.
Berkshire is the financing partner. In that role, we purchased $8 billion of Heinz preferred stock that carries a 9% coupon but also possesses other features that should increase the preferred’s annual return to 12% or so. Berkshire and 3G each purchased half of the Heinz common stock for $4.25 billion.
Though the Heinz acquisition has some similarities to a “private equity” transaction, there is a crucial difference: Berkshire never intends to sell a share of the company. What we would like, rather, is to buy more, and that could happen: Certain 3G investors may sell some or all of their shares in the future, and we might increase our ownership at such times. Berkshire and 3G could also decide at some point that it would be mutually beneficial if we were to exchange some of our preferred for common shares (at an equity valuation appropriate to the time).
As Buffett mentioned above, the 44 year old Bernardo Hee’s was made CEO of Burger King when 3G Capital bought them in 2010. He is now CEO of Heinz.
What is Hee’s secret to company turn arounds?
Here are a few points on how Hee’s doubled Burger Kings margins measured by EBITDA in two years (as mentioned by Alex Cuadros in his Bloomberg business week article).
- Re-casted Burger King as an owner of franchises rather than an operator of restaurants and sold off locations owned by the company. This allowed Hees to shove about 28,000 employees off Burger King’s balance sheet.
- Due to the above, the company did not have to spend as much refurbishing restaurants. Instead, it offered loans and incentives to get the job done.
- Scrapped the advertising strategy that catered to young males and got rid of the creepy bearded mascot, the King.
- Formed joint partnerships in emerging markets where the partners put up all or most of the cash.
- Slashed costs and upper management jobs, added menu items including smoothies, salads and desserts.
- Fired about half of the 600 employees at Burger King’s Miami headquarters.
- At headquarters, cubicles and offices were replaced with “pods,” or tables seating four to six people.
- In her Wall Street Journal article, Julie Jargon mentioned Mr. Hees sits in the open with other top executives, their desks in a semi-circle. White noise is piped into the office through speakers so that the din of working in such close proximity isn’t so distracting.
- Put in place a system where, instead of basing budgets on the previous year’s, managers started at zero every 12 months and had to make a case for why they should get more.
What has happened to Heinz since Hee’s became CEO?
Tore down Global Offices to promote increased collaboration and faster communication.
- McDonald’s Corp said it plans to end its 40-year relationship with ketchup maker H.J. Heinz Co, given Hee’s used to run Burger King.
- The condiment maker has grounded corporate planes, unplugged mini-fridges and limited employee printing in an effort to create savings that can help pay for the $12.6 billion in borrowing that supported the $23.3 billion takeover (noted by Tracer and Buhayar in their Bloomberg article).
- Heinz said it will fire 1,350 workers as it closes manufacturing plants (Florence, South Carolina; Pocatello, Idaho; and Leamington, Ontario).
- Added 470 employees at other facilities.
- Heinz appointed Eduardo Luz as president of its North American division, the third such executive in a year.
- The company made a “strategic decision” to focus on improving its margins and limited the frequency and depth of sales promotions, Chief Financial Officer Paul Basilio said on a conference call.
In the end, Lemann is an empire builder and he is building his empire with stable products and lots of cost cutting. He has entrusted Hee’s to run Burger King and Heinz and it is very apparent that increasing margins through cost cutting are top of the agenda.
Fabiola Moura. Bloomberg. “Billionaire Dethrones Kings in Beer to Burgers as Batista Model”. Oct 18, 2011. http://www.bloomberg.com/news/2011-10-18/billionaire-dethrones-kings-in-beer-to-burgers-as-batista-model.html
Alex Cuadros. Bloomberg Businessweek. “Jorge Lemann: He Is … the World’s Most Interesting Billionaire”. August 29, 2013. http://www.businessweek.com/articles/2013-08-29/the-brazilian-billionaire-who-controls-your-beer-your-condiments-and-your-whopper#p2
Julie Jargon. Wall Street Journal. “Heinz’s New CEO Cut His Teeth at Burger King”. April 11, 2013. http://online.wsj.com/news/articles/SB10001424127887324240804578416354096718938
Zachary Tracer and Noah Buhayar. Bloomberg. “Buffett-Backed Heinz to Cut 1,350 Jobs, Close 3 Plants”. Nov 14, 2013. http://www.bloomberg.com/news/2013-11-14/buffett-backed-heinz-to-cut-1-350-jobs-close-3-plants.html
Paul J. Gough. Pittsburgh Business Times. “H.J. Heinz names new North American chief”. Jan 14, 2014. http://www.bizjournals.com/pittsburgh/blog/morning-edition/2014/01/hj-heinz-co-names-new-north.html