Savoring juicy details on Heinz/Buffett deal

As we’ve footnoted before, investor extraordinaire Warren Buffett has said that his favorite section of any merger-related proxy is the “background of the deal.” It’s our favorite section too. So when HJ Heinz (HNZ) filed this 223- page merger proxy late Monday with additional details about its acquisition by Buffett’s Berkshire Hathaway (BRK.A) and 3G Capital for $23 billion that was announced on Feb. 14, we promptly dug in. Our other favorite section is the details that spell out how much the executives walk away with. We’ll tackle that part first.

Some of the juiciest details related to compensation were quickly picked up by the WSJ, which noted in this piece that Heinz CEO William Johnson could walk away with more than $200 million, which includes a so-called golden parachute payment of $56 million (a detail found on pg. 80). That same page shows that as a group, Heinz’s top executives could walk away with another $105 million in golden parachute payments. A second table on pg. 86 shows stock holdings for the top executives, including $99 million held by Johnson. As a group, the other top executives and 12 directors stand to redeem over $130 million in vested holdings once the deal closes. Footnoted readers probably recall that Heinz stock jumped by 20% on the news (and that a $90,000 bet on Heinz options the day before the deal was announced yielded a $1.7 million profit that has attracted the attention of numerous regulators). One other interesting tidbit from the table on pg. 86: billionaire activist investor Nelson Peltz, who went after the ketchup giant in 2006, will make the least amount of money of any Heinz director on the deal from his personal holdings: just $235K.

But it’s the background of the deal that shows how things came together. According to the filing 3G Capital first reached out to Heinz in mid-December and that representatives met with Johnson a week before Christmas. Then, everyone disappeared for the holiday. It wasn’t until Jan. 10 that representatives of 3G had a meeting with Johnson in Pittsburgh and told him that they and Berkshire planned to make an offer for Heinz. The following Monday, on Jan. 14, 3G presented a formal offer for $70 a share.

On Jan. 16, Heinz was told that $70 was the best offer it would receive. As the filing notes, Lazard Freres, which was representing Berkshire and 3G told Heinz’ advisors that  “that the Investors do not typically negotiate price after making an initial offer and did not expect to do so here, and that, accordingly, Heinz should not expect the Investors to increase the price they were willing to pay above $70.00 per share.” But less than 10 days later, the offer was boosted to $72.50 a share.

One other thing that comes across loud and clear in the filing. Heinz’ executives and directors kept seeking assurances that once the deal was done the investors wouldn’t abandon Pittsburgh. There’s several places in the filing where this is mentioned. In the initial offer made on Jan. 14, the filing notes that the offer letter included assurances that the investors “had the highest respect for Heinz’s Pittsburgh, Pennsylvania heritage”. And the revised offer specifically stated that “the Investors would, following the consummation of a transaction, build upon Heinz s Pittsburgh heritage.”

The love for Pittsburgh is a nice folksy touch in a document that is otherwise a lot of lawyer-speak. And while we doubt that Buffett played any sort of role in writing the “background of the merger” we’re pretty confident — based on his public comments in the past — that he read it.