H.J. Heinz Company
Maryanne M. Rouse
H.J. Heinz Company (HNZ) and its subsidiaries manufactured and marketed an extensive line of processed and minimally processed food and related products throughout the world. The company’s products were organized into two core businesses: meal enhancers and meals and snacks. Heinz distributed its products via its own sales force, independent brokers, agents, and distributors to chain, wholesale, cooperative, and independent grocery accounts; mass merchants and superstores; pharmacies; club stores; food service distributors; and institutions, including schools and government agencies.
The Del Monte Merger
IN JUNE 2002, HEINZ ANNOUNCED THAT IT WOULD SPIN OFF AND THEN MERGE ITS SLOWER-SELLING PRODUCTS WITH DEL MONTE FOODS, INC., IN AN EFFORT TO SIMPLIFY ITS BUSINESS. AFTER POSITIVE VOTES BY BOTH HEINZ AND DEL MONTE SHAREHOLDERS AND APPROVAL BY THE IRS, THE TRANSACTION, COMPLETED ON DECEMBER 21, 2002, GAVE HEINZ SHAREHOLDERS APPROXIMATELY 75% OF THE NEW, MUCH LARGER DEL MONTE. THE PRODUCT LINES/SEGMENTS SHIFTED TO DEL MONTE INCLUDED HEINZ’S U.S. AND CANADIAN PET FOOD AND PET SNACKS BUSINESSES; U.S. TUNA; U.S. PRIVATE-LABEL SOUPS AND GRAVIES, AS WELL AS COLLEGE INN SOUPS; AND U.S. INFANT FEEDING. THE AFFECTED BRANDS INCLUDED STARKIST, 9 LIVES, KIBBLES ‘N BITS, NATURE’S GOODNESS BABY FOOD, AND COLLEGE INN SOUPS. THE MERGER WAS EXPECTED TO REDUCE HEINZ’S ANNUAL REVENUE BY APPROXIMATELY 20%, OR $1.8 BILLION, WHILE DOUBLING DEL MONTE’S SIZE.
Under the terms of the merger, Heinz shareholders received 0.45 share of stock in the new Del Monte for every share of Heinz stock owned, while Del Monte assumed approximately $1.1 billion of Heinz’s debt (about 21% of Heinz’s total debt). Heinz also announced that it would reduce its dividend by 33%. (The dividend reduction was expected to free up substantial cash flow, which Heinz planned to use to pay down debt and underwrite additional marketing.) The merger was effected in several steps, including the transfer of Heinz assets to a temporary entity, SKF, which was then merged, along with the existing Del Monte, into a “new Del Monte.” The complicated deal, referred to as a reverse Morris Trust, resulted in a tax-free transfer because Heinz shareholders would ultimately own a majority of shares in the new Del Monte.
______________________________________________________________________________ This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida. Copyright © 2005 by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without the written permission of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to the publisher, Prentice Hall, for the books, Strategic Management and Business Policy–10th and 11th Editions (and the International version of this book) and Cases in Strategic Management and Business Policy–10th and 11th Editions by the copyright holder, Maryanne M. Rouse. This case was edited for SMBP and Cases in SMBP–11th Edition. The copyright holder is solely responsible for case content. Any other publication of the case (translation, any form of electronics or other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless Maryanne M. Rouse has granted an additional written reprint permission.
In addition to allowing Heinz to sell its sluggish brands on an essentially tax-free basis, the company noted that the smaller, less-diverse Heinz would become a more flexible, faster-growing company focused on two strategic food platforms: meal enhancers (ketchup, condiments, sauces) and meals and snacks (frozen and shelf-stable meals and snacks, food service frozen products, and infant feeding in non-U.S. markets). The new Heinz would have a global structure, which the company believed would enhance its ability to compete outside the United States. Reducing debt would enable...