February 19, 2013 7:03 pm

Heinz deal puts 3G in limelight

On the website of the Brazilian spearfishing confederation, Carlos Alberto Sicupira appears alongside his record Blue Marlin catch. The giant fish, weighing 301 kilos, is not the only spearfishing record held by the partner of 3G Capital, the Brazilian ­private equity firm, with others registered for grouper and horse-eye jack.

Mr Sicupira and his partners, Jorge Paulo Lemann and Marcel Telles have bigger fish in their sights, with last week’s announcement that they are joining Warren Buffett in a $23bn takeover offer for Heinz, the largest such deal in the packaged food industry.

The transaction catapults a group of media-shy Brazilian billionaires – Mr Lemann is ranked as Brazil’s richest man by Bloomberg – and their US-based investment company 3G Capital, managed by veteran Brazilian banker Alex Behring, into the limelight.

The Heinz offer is the result of three decades of careful investing, from their role in the creation in 2008 of the world’s biggest brewer, AB InBev, to the formation of 3G Capital in 2004 and its $3.3bn investment in US fast-food chain Burger King in 2010.

“The 3G strategy has evolved,” said one private equity executive familiar with the partners. It started with minority investments in infrastructure that were not very successful. “They moved clearly towards the strategy of being controlling investors in very large assets with global brands.”

A former Brazilian tennis champion, Mr Lemann, 73, graduated from Harvard in 1961. Ten years later, he set up his own investment bank, Banco Garantia, which together with his partners, Mr Telles and Mr Sicupira, he sold on to Credit Suisse in 1998.

Focus on option contracts

US regulators are examining a Zurich-based brokerage account that allegedly was used to trade Heinz option contracts before the transaction to take the food group private was announced last week.

On Friday, two days after the trade, the Securities and Exchange Commission won a court order to freeze $1.8m in the omnibus account held by Goldman Sachs to prevent the money from flowing out of the regulators’ reach. Goldman said it is co-operating with the investigation.

Now the task turns to connecting the purchase of 2,533 Heinz call option contracts to the traders. The call option is a bullish bet and allows the buyer the right to buy Heinz stock for $65 before it expires in June.

After the takeover by Berkshire Hathaway and 3G Capital was announced, the value of the call option rose in value and Heinz’s shares shot up 20 per cent to $72.50, giving the holder of the option a profit of $1.7m, the SEC alleged.

The SEC could run into obstacles – including Swiss privacy laws – in tracking the trades.

The quick response by regulators may have bought them some time. If the account was credited before the asset freeze the SEC would have a near impossible task to recover the money.

The SEC has experience in navigating offshore trading. In October Well Advantage, a private company controlled by a Chinese billionaire, paid $14m to settle insider trading allegations after the SEC sued the firm for buying shares of Nexen, a Canadian oil group, in the days before it agreed to be acquired by China’s Cnooc.

Well Advantage did not admit or deny wrongdoing. The SEC alleged other businesses owned by the billionaire, Zhang Zhirong, had a close relationship with Cnooc.

The FBI has joined the SEC in its investigation into trading of Heinz option contracts before the $28bn deal was announced. “We are consulting with the SEC to determine if a crime was committed,” said a spokesman for the FBI’s New York office.

-Kara Scannell

Mr Telles started as a trainee at Garantia while Mr Lemann met Mr Sicupira while surfing and diving in Rio de Janeiro.

The partners founded another big investment firm, GP Investments, which they sold in 2004. But it was in 1989 that they began their most lucrative investment, with the acquisition of Brahma, then Brazil’s second-biggest brewer.

In 1999, they announced the controversial merger of Brahma with Antarctica, Brazil’s biggest brewery, to create Ambev. The merger, which won a more than 70 per cent market share, benefited from Brazil’s weak anti-competition regime.

Ambev supplied the firepower to make acquisitions, including Belgium’s Interbrew, to create InBev. They followed up with the $52bn deal with Anheuser-Busch of the US to create AB InBev. The partners are believed to use the dividends from AB InBev – Bloomberg valued Mr Lehman’s 10 per cent stake at nearly $15bn in November – to fund 3G.

The name 3G derives from the trio’s partnership as the three “amigos” who ran Garantia, their original investment bank.

One person familiar with 3G said the fund, whose manager Mr Behring is a former Garantia banker and Baker Scholar at Harvard, raises closed funds for individual deals. As of last year, 3G had about $3.2bn in assets under management.

In spite of earlier teething problems, 3G’s investments are showing promise. After taking Burger King private in 2010, they relisted it last year through a reverse offering at a 45 per cent premium to the takeover price.

In Brazil, it is difficult to meet a banker who was not been mentored by Jorge Paulo Lemann. One tells how he was courted by Mr Lemann from the moment he started studying at one of the top US universities.

“His basic principle is to be surrounded by very good people, excellent people,” the banker said.

Not an operational man, he expects his managers to deliver results in return for high compensation. Credit Suisse’s São Paulo office remains near the top of the league tables partly because it did not change the old Garantia management philosophy, bankers say.

The company encourages employees to think like owners and focuses on cost-cutting. Performance is not measured simply on increases in sales or market share. “Performance is measured in terms of return on capital. If this sounds pretty simple, it is supposed to be,” says one person who knows Mr Lemann.

James Allen, a partner at Bain & Company and author of Repeatability, a study of AB InBev’s performance, said Mr Lemann and his partners have nearly doubled margins at every incarnation of the group, from the early days of Ambev until AB InBev.

Anheuser Busch’s pre-merger ebitda margin of 23 per cent in 2007 rose to 38 per cent at AB InBev, the combined group, in 2010.

It may prove more challenging to extract the same improvements from Heinz, already a market leader and a strong performer.

But Mr Lemann and his partners will relish the challenge – big game fishing does not come any bigger than this.

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