Introduction

In 2013,the ketchup company known for the slogan 57 Varieties, the H.J. Heinz Company (Heinz) was acquired byan investment consortium comprised of Berkshire Hathaway, Inc. (Berkshire) and the global investment firm, 3G CapitalPartners Ltd. (3G Capital)for over $28billion(Merger).1At the time of the Merger, Heinzwas a publicly traded Delaware company, headquartered in Pittsburgh, Pennsylvania. With about 60 percent of its sales outside the US, Heinz manufactured and marketed to over 200 countries ketchup,sauces,soups,beans,and pastaundervarious brand names, including Heinz,T.G.I. Fridays snacks,Plasmon infant nutrition, Lea & Perrins Worcestershiresauce, and Classico pasta sauce.2In 2012, Heinzsprofit was over $900 million on revenues of over $11 billion and employedmore than 30,000 people.3Why did Berkshire Hathaway and 3G Capital acquire Heinz? What were the US tax and non-tax consequences ofHeinz being sold?

Merger Timeline

In early December 2012, Jorge Paulo Lemann, partner and co-founder of 3G Capital, Jorge Paulo Lemann, met withBerkshires CEO and chairman, Warren Buffett,and proposed that 3G Capital and Berkshire jointly acquire Heinz. Following the meeting, Mr. Buffett informed Mr. Lemann that Berkshire was interested in acquiring Heinz and would be willing to provide equity financing for apotential acquisition. On December 13, 2012, the chairman, president, and CEO of Heinz, William R. Johnson, was asked by representatives of 3G Capitals financial advisor, Lazard Freres & Co, LLC to meet with 3G Capital in order toshare their views on the food and beverage industry.9At a dinner meeting on December 18, 2012, Mr. Johnson discussed with Mr. Lemann and the managing partner of 3G Capital, Alexandre Behring, the food and beverage industry, potential industry consolidation, and their respective businesses and agreed to meet in 2013 to continue their discussion. At a meeting on January 10, 2013, Mr. Behring told Mr. Johnson that, together with Berkshire, 3G Capital(the Acquirers)was interested in discussing the potential acquisition of Heinz and intended on making a proposal to acquire Heinz. Mr. Johnson stated that Heinz was 4not for sale, but that he would inform Heinzs board of directors of their discussion and would present any acquisition proposalto the board. On January 14, 2013, Berkshire and 3G Capital delivered a joint letter to Mr. Johnsonproposing to acquire Heinz for $70 in cash per share of all of the outstanding shares of Heinz common stock. After Heinzs board of directors deliberated about the Acquirers proposal, on December 16, 2013, Mr. Johnson contacted Mr. Behring and told him that Heinz was considering the proposal, but that Heinz had made no decision about the proposal or whether to authorize further discussions. On January 21, 2013, Heinzs board directed Mr. Johnson to inform the Acquirers that it was unlikely to authorize further merger discussions unless the Acquirers improved the financial terms of their proposal. On January 24, 2013, the Acquirers offered to increasetheir offer to $72.50 in cash per share of Heinz common stock, which was a premium of 19.6 percent to Heinzs closing share price of $60.64 on January 24, 2013.At its January 30, 2013 meeting, Heinz board unanimously concluded that the [Acquirers] revised proposal represented an attractive opportunity compared to other available alternatives (including remaining a standalone company) and that it would be in the best interest of Heinz shareholders and other constituencies to continue discussions with [Acquirers]and authorized further discussions with Acquirers.10Several factors Heinzs board of directors considered potentially positive about the Merger were that:1.the $72.50 per share offer exceeded Heinzs likely value as a standalone company; 2.it was unlikely that other buyers would be willing to acquire Heinz at a price in excess of the $72.50 per share offer, even if Heinz conducted an auction process or solicitated other alternative acquisition proposals;3.the Merger consideration was solely of cash; 4.Heinzs headquarters would remain in Pittsburgh; 5.Heinzs heritage and the name H.J. Heinz Company wouldbe preserved; and 6.Heinzs support for charitable and philanthropic causes in Pittsburgh and other communitieswouldcontinue.11 5Several potentially negative factors of the Mergerthat the board considered were that: 1.Heinz would no longer exist as an independent, public company;2.Heinzs shareholders would not be able to participate in any value creation that Heinz could generate in the futureand/or in any future appreciation in the value of Heinz;3.Heinz had not solicitated proposals from other potential buyers; and 4.The Merger consideration would be taxable to Heinzs shareholders. After several weeks of further negotiations,on February 13, 2013, Heinzs board of directors voted unanimously to approve the Merger and to recommend that Heinz shareholders vote to approve the Merger.12On the same day, Heinz entered into a definitive merger agreementto be acquired by Berkshire and 3G Capitalwith each Heinz shareholder receiving $72.50 per share or a total of $23 billionand with along the assumption of Heinzs outstanding debt, the Merger was valued at $28 billion.Berkshire and 3G Capital agreed to maintain Heinzs headquarters in Pittsburgh, preserve Heinzs heritage, support Heinzs philanthropic and charitable causes in Pittsburgh,and honor its obligations under the naming rights and promotion agreement relatingto Heinz Field, professional baseball stadiumlocated in Pittsburgh.13In response to the public announcement of the Merger on February 14, 2013, Heinz CEO, Mr. Johnson stated that: [t]he Heinz brand is one of the most respected brands in the global foodindustry and this historic transaction provides tremendous value to Heinz shareholders and that Heinz looked ...forward to partnering with Berkshire Hathaway and 3G Capital... in what will be an exciting new chapter in the history of Heinz.14Berkshire CEO, Mr. Buffet stated that Berkshire was very pleased to be a part of this partnershipand that Heinz had ... strong, sustainable growth potential based on [its] high quality standards, continuous innovation, excellent management and great tasting products.15Concerning the Merger, 3G Capital partner, Mr. Behring stated that 3G Capital had ... great respect for the Heinz brands and the strong business that management and its employees operate around the world and recognized Heinzs value and heritage.16He also stated that the Merger would provide...tremendous value to Heinz shareholders and that asa private 6company, Heinz would ...have an opportunity to drive further growth and advance[its] commitment to providing consumers across the globe with great tasting, nutritious and wholesome products.17At a special shareholders meeting held on April 30, 2013, Heinz shareholders voted to approve the Merger with approximately 95 percent of the votes cast voting in favor of the Merger, which represented approximately 60 percent of Heinzs total outstanding common stock.18On June 3, 2013, Heinz announced that it had received all of the regulatory approvals required for the Merger, including the early termination of the waiting period under theHart-Scott-Rodino Antitrust Improvements Act of 1976.19On June 7, 2013, Heinz merged with and into Hawk Acquisition Sub, Inc. (Hawk Subsidiary),with Heinz surviving as a wholly-owned subsidiary of Hawk AcquisitionCorporation II, which was an indirect, wholly-owned subsidiary of Hawk Acquisition Holding Corporation(Hawk Acquisition Holding). Hawk Acquisition Holding had been formed for purposes of the Merger andwas controlled by Berkshire and 3G Capitaland following the Merger, it was renamed the H.J. Heinz Holding Corporation (Heinz Holding).20With the assumption of Heinzs outstanding debt, the total Merger consideration was approximately $28.75 billionand was fundedwith a combination of equity contributions by Berkshire and 3G Capital and debt financingobtained by HawkSubsidiary.Specifically, Berkshire and 3G Capital each purchased $4.12 billion worth of Heinz Holdings common stock. Berkshire also purchased $8 billion worth of Heinz Holdings 9 percent preferred stock. HawkSubsidiary issued and sold over $3 billion of 4.25 percent second lien senior secured notes due in 2020 and had obtained over $9billion of term loans under senior secured credit facilities.21In response to the June 7, 2103 announcement that the Merger had been completed, the new CEO of Heinz, 3G Capital partner Bernardo Hees stated that he looked ...forward to building upon Heinzs incredible platform and delivering world-class products for all of our consumers around the world, while maintaining... [Heinzs] unwavering commitment to quality, safety and superior customer service.22Former Heinz CEO, Mr. Johnson became a part-time advisor to Mr. Hess on certain specific industry and strategic non-operating matters.23 7After the Merger, Heinzs common stock ceased to be publicly traded and was delisted from theNYSE.

Discussion Questions1.Under US tax laws, what is a taxable acquisition and its tax consequences?

2.Under US tax laws, what is a tax-free reorganization and its tax consequences?

3.Under US tax laws, was theHeinz Mergera taxableacquisitionor a tax-free reorganization? Based on your answer,what would have been the US tax consequences forHeinz and its shareholdersand Heinz Holding?Why was this type of structure used?