1 2 Dear Fellow Shareholder, Heinz’s establishment 140 years ago in the small town of Pittsburg, Pennsylvania marked the start of what is now a multi-­‐billion dollar company in the food processing industry. Our dedication to growth has led us to acquire Quero and Foodstar in the past fiscal year in order to expand Heinz’s presence in Brazil and China, respectively. Recently we looked to acquire McCormick, a food processing company most known for their seasoning products. After evaluating the strengths and weaknesses of their company, and potential synergies with our own, Heinz determined that it was in the best interest of the future of the company and shareholders to acquire McCormick. We feel that the transaction will lead to growth that would be otherwise unattainable due to our previous financial status. We were careful not to overvalue McCormick because of our lack of cash on hand. Keeping this in mind, we acquired the company at a 26% premium, while maintaining a 2.6 debt/EBITDA ratio, well within range of industry averages. We came to this number using various valuation metrics, including numerous ratios in our Comparable Companies Analysis. We feel that we paid a reasonable price when considering the potential growth in EBITDA that we calculated in our Proforma. I personally understand that you may be worried about how immediate the benefits will be. But I am confident that the diluted EPS will reach pre-­‐merge numbers after a maximum of two years. Furthermore, the potential synergies between our companies are endless, ranging from operational synergies to marketing synergies. There is endless potential with this new company. Heinz believes that the acquiring of McCormick falls under the umbrella of our recent transactions of other brands to bolster our current growth. McCormick’s presence in both the U.S. and emerging markets around the world will lead to the formation of a new, stronger company. We are confident that this acquisition will help the future of Heinz, and in turn, to you our loyal shareholders. Regards, Minjun Kim CEO of Heinz 3 Table of Contents I.
The Transaction
4 II.
Synergies
5 III.
Marketing
8 IV.
Human Resources
10 V.
Legal Proceedings
11 VI.
Information
Technologies
13 VII.
Financial Data
15 VIII.
Proforma
25 IX.
SWOT Analysis
28 X.
Closing Remarks
31 4 The Transaction: Heinz’s Acquirement of McCormick Price •
Heinz and McCormick agreed to a premium of 26%, an aggregate value of $8,215,897,818. Method of Payment •
Heinz and McCormick agreed to a 12/88 cash to stock ratio. Both companies understood the value of using stock as the preferred form of payment because of the lack of cash that Heinz has. Furthermore, the ratio is indicative of both companies’ confidence that the company will grow and create earnings which will profit shareholders significantly. The 88% being paid in stock also gives McCormick shareholders an aggregate 32% control over the new company, thereby leaving original Heinz shareholders with a large majority. Both companies also understood that if the ratio was in favor for more cash, our working capital would cease to exist. In effect, this would hypothetically cause the new company to fail because of the lack of funds to actually implement the proposed synergies. •
Stock: 88%: $7,229,990,080 •
Cash: 12%: $985,907,738 Terms of the Deal •
Company name: Heinz •
Board of Directors: 32% representation by McCormick •
CHRO of McCormick replaces Heinz’s CPO Valuation •
In the valuation of McCormick, we looked at various metrics to accurately evaluate the desired price that we wanted to pay. The main valuation metric, Comparable Companies Analysis, was used in multiple ways to value McCormick with respect to similar companies in the recovering food processing industry. We compared EV/EBITDA ratios, P/E ratios, and debt/equity multiples to similar companies such as Dean Foods, International Flavors and Fragrances, Campbell, General Mills, and even Heinz itself in order to create ranges to see where McCormick would be valued in the industry. The 5 range for EV/EBITDA was 9x-­‐12.3x, with the average at about 10x. McCormick’s EV/EBITDA was the 12.3x, which was well above the average. We also looked at inventory turnover ratio and average collection period in order to evaluate how steady the cash flow really is. Changes in Executive Board CEO of Heinz will remain as is CEO of McCormick will now instead be on the board of Directors CMO of Heinz will remain as is CMO of McCormick will receive severance package CFO of Heinz will remain as is CFO of McCormick will receive severance package CLO of Heinz will remain as is CLO of McCormick will now instead be on the board of Directors COO of Heinz will remain as is COO of McCormick will now be on the board of Directors CHRO of Heinz will be laid off and given a severance package CHRO of McCormick will become that of Heinz CTO of Heinz will remain as is CTO of McCormick will receive severance package Synergies There were numerous potential synergies that were taken into consideration during the transaction. These synergies were aimed to streamline the company’s operating costs, create more opportunities, and increase revenue. Plantations and Factories •
Plantations and factories will both be merged in order to reduce our companies operating expenses. This will allow the company to generate more profit off of every single dollar that we make. Onion and peppers are two of the most important raw materials produced for both companies. Therefore, we can combine these plants into one large plant that will save a significant amount of money. Overall, it’s the little things 6 like these that add up in order to generate more revenue as well as reduce our operating expenses. Food Production •
In terms of food production, there are already some overlaps in which Heinz will immediately save money from the transaction. For example, many of Heinz packaged meals such as Weight Watchers, or whole food supplied to T.G.I. Friday’s already contain McCormick’s spices as ingredients. However, we feel that we can take this even further by substituting any spices currently used in our foods and sauces with McCormick. Furthermore, we will even use our sauces to complement various foods such as our soy sauce in China with McCormick’s Simply Asia Chinese brand. Its several things like these that complement each other which is ultimately why this transaction took place. Stock holder’s benefit from the cuts in operating expenses which allows us to circulate more cash, some of which goes to the shareholders. Effective Advertising •
Effective advertising is also a key ingredient in this transaction to save money. Effective advertising includes not only cost efficiency, but also making sure that the advertisement is appealing to our customers. One of our campaigns that does this most efficiently is our recipe campaign. In this advertisement we place recipes on the back labels of our roducts which include both Heinz and McCormick. This will cause both companies to perform consistently well throughout the entire year, rather than just one or two quarters. Contracting •
There are several scenarios in which Heinz is now able to bargain for lower pricing in several of its contracts with industrial stores. For example, with Walmart, a top industrial supplier of Heinz and McCormick, both brands would be able to combine in order to bargain for a lower price. This will save some expense costs by putting these contracts together. 7 Employees •
Taking into consideration that Heinz has a total of 34,800 employees working worldwide around the world and that McCormick has a total of 7,500, now that McCormick has been acquired, both companies employees will be pooled together. There will be an evaluation period, specifically targeting areas where there is a considerable amount of overlap of employees, that will last from 6 months to one year. From the results of the evaluation period, certain employees will then receive a severance package. Marketing •
In regards to marketing, the environmental friendly bottle of McCormick will be appealing to its customers who are concerned about the environment. Heinz is using its reputation to help McCormick even further enhance its great historical reputation. Moreover, the advertisements on television will consist of popular cooking shows using McCormick’s brand name. In addition, this will appear on blogs and other recipe searching websites. This helps to directly advertise to our consumers and those who are most likely cooking. All in all, these marketing methods help us to reach new consumers in the most efficient and cost saving way. Less competition •
In terms of expanding and becoming too powerful a company there should be no worries. This transaction will most definitely provide an advantage in the global market, while still maintaining legal standards such as Anti-­‐Trust laws. •
Before the acquisition of McCormick, both companies would compete for equity investors. Now that Heinz has acquired McCormick, there is less competition in that sense and thus providing the company more chances for more investments. Research and Development •
Both the Heinz and the McCormick companies are focusing on being more eco-­‐friendly and beneficial to humanity. They are both reaching out to create greener products that will help the environment by using less plastic and plants instead to package their products. Also, both companies are reaching out to help humanity by creating products 8 that will help solve diseases such as iron deficiency in developing countries. Together the two companies will be the leading directors in creating a better plant. International Expansion •
The Heinz company owns products that are sold world wide as well as the McCormick company. Heinz owns products that sell in America, China, The United Kingdom, Brazil and other parts of South America, as well as Canada. One of the reasons McCormick complements Heinz on the basis of a global market is that it only overlaps Heinz in few regions. McCormick in order to complement Heinz has markets in the Middle East as well as the southern region of Africa. having this much power in the global market will allow the company to drastically enhance our profit which is clearly appeasing to you, the shareholder. Marketing Company Name and Logo •
Heinz and McCormick have both agreed to keep the Heinz company name and logo as the face of the corporation. Heinz’s name is associated with reliability, quality, and transparency. However, that is not to say that the McCormick brand will be disregarded. The Heinz brand name only pertains to a limited amount of its products which include, ketchup, mustard, and barbecue sauce and a few other brand names that prominently display the Heinz logo, other products owned by Heinz consist of a small, but noticeable logo in the back corner of the product. The McCormick product is a much trusted name. However, it does bring about a few flaws such as the lack of abiding by EPA and FDA regulations. Rather than follow these important environmental laws, McCormick consistently rather chooses to pay a small fine. Despite this our company has chosen to keep the McCormick name while changing its environmental reputation. McCormick will continue the Heinz trend of having the name on the back logo. However, our logo will also include “Now EPA and FDA approved” in order to promote its positive environmental adaptation. Moreover, Heinz is far more significant in size than McCormick therefore, influencing our decision that it should remain the same. All in all, 9 the McCormick brand is simply not big enough to influence the Heinz name on such a grand scale. Advertising Campaigns •
Currently, much of McCormick’s expenses on advertising are allocated towards social networking sites such as Facebook. Heinz has decided to reallocate funds after looking at McCormick’s target consumer: those who cook regularly in the household. Both companies agreed that the target consumer is middle, just older generations in general. Social media networking however, consists of a young, teenage and young adult audience. Therefore, this is not the place for McCormick to be as they are advertising to the wrong consumer. A teenager, for example, will most likely not click on an advertisement that is related to cooking. There are places where audiences of any age can be targeted, while all still having an interest in cooking. Therefore, Heinz plans to use places such as food blogs, and other sites such as epicurious or foodnetwork. The efficiency of these advertisements will dramatically increase because these are the sites that people search for recipes and furthermore, share the common interest of cooking. In addition to these online advertisements, McCormick will also have contracts with cooking shows. These shows will advertise the use of McCormick’s spices in any use of spice in a recipe. Viewers of these shows, attempt to cook like the chefs in any way and that includes using the same products. This will create a trust of McCormick for the viewers and will overall be a more successful use of advertising than before the transaction. Spreading the Word •
In order to spread the word of our transaction with McCormick. Heinz has chosen to go beyond just placing the logo on the McCormick brand. Both Heinz and McCormick’s brand name products will now include recipes on the back that use at least one Heinz and one McCormick product. McCormick’s elegant spices compliment the palate pleasing flavors of Heinz’ sauces and this combination be used in several recipes. Therefore, our test kitchens will work on creating homemade recipes on the back label of bottles that will use this pleasant combination. These recipes will include, but are not 10 limited to meat loaf, barbecue sauce, and meat sauce. Since Heinz and McCormick are both seasonal companies, Heinz generally performing well in the first and second quarters, while McCormick performs well in the third and fourth, this will allow both companies to perform well year round. When cooking a meat loaf for the holiday season, McCormick’s best performance quarter, one will be able to use this recipe that promotes a Heinz product, in Heinz’ weakest quarter. This will also play out in the opposite way with the barbecue sauce. Therefore, this type of advertising allows us to generate more revenue through both products by making them consistently strong year round. Subsequently, while doing this, advertising costs will be cut, which reduces our operating expenses by advertising on each others products. Overall, this strategy will consist of the perfect combination of increase in revenue and decrease in operating expenses. Human Resources Employees •
Looking carefully in that both Heinz and McCormick's benefits plans are very similar they will still retain the benefits the employees already know pertaining to their medical, prescription drug, dental, disability, life insurance, vacation and sick leave plans. However the 401(k) savings plan for Heinz will replace that of McCormicks seeing as it is more cost efficient. There will be an evaluation period, specifically targeting areas where there is a considerable amount of overlap of employees, that will last from 6 months to one year. From the results of the evaluation period, certain employees will then receive a severance package. •
Awareness of the Transition Seeing as how McCormick is the recipent many times of the James Rouse Diversity Award in cause of their great communication between employees and higher management, we want to keep the employees fully aware of the acquisition. Emails and letters will be sent notifying them of the upcoming transition. If they have any questions or concerns, there will be a hotline both online via email or by phone in which they can 11 receive the information that they need, free of charge.All employee communications made will be treated promptly, professionally and without risk of retaliation. Clarification of Severance Packages With the merging of both companies it will be necessary for McCormick & Heinz to decrease the amount of their combined factories, distribution centers, and workers. In preparation for the employment cuts, both Heinz and McCormick’s have come up with a base severance package that will differ for each employee, ultimately dependent upon each worker’s title and salary. The plan includes: •
One week of payment for every year the employee worked for the company, with a maximum of 26 years recognized •
Current health and dental benefits for two months or whenever the worker finds employment, whichever comes first Our Chief-­‐level Officers will also be offered severance packages based on employment contracts previously established. The packages include: •
A lump sum payment equal to his or her accrued but unused vacation time •
Post-­‐employment health benefits for the remainder of the calendar month of departure and optional benefits payable under the Consolidated Omnibus Benefits Reconciliation Act for up to 18 months following termination. •
Severances equal to one week of base pay for every year of service, plus six weeks; maximum of 8 years recognized. Legal Proceedings Pending Litigations: •
Neither Heinz nor our target McCormick has any major legal obligations that may pose a threat or slow down the growth of our joined organizations in practice. Environmental Concerns: 12 •
Despite McCormick’s prior allegations of environmental issues, we believe that these resolved litigations are minor issues that are immaterial. This is because McCormick and its subsidiaries to the Company's knowledge, no director, officer, agent, employee or affiliate of the Company or any of its subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation of the FCPA, by making use of the mails or interstate commerce corruptly in furtherance of an offer, payment, promise to pay or other property, gift, promise or authorization of the giving of anything of value to any official, foreign or domestic. McCormick has proven that although they have had some legal disputes prior to the acquisition, their brand name and standing as viewed by the consumers, still remains to be in good light and strong worldwide. We are confident that in relation to the prosperity and success of Heinz and McCormick, the new company from a litigation stance is sound. Patent Litigation •
Heinz has developed or participated in the development of certain equipment, manufacturing processes and packaging, and maintains patents and has applied for patents for some of those developments. Heinz recognizes these patents and patent applications as important but does not consider any one or group of them to be materially important to its business as a whole. McCormick also owns various patents, none of which individually are viewed as material to the business and will affect its performance. Trademark Litigation •
McCormick has numerous licensing agreements authorizing the use of trademarks by affiliated and non-­‐affiliated entities. The loss of these license agreements would be immaterial to the business. McCormick’s license agreements last on average between 3-­‐
5 years. Those agreements with specific terms are renewable upon agreement of the parties. With the acquisition of McCormick, the Company gains numerous trademarks, some of which are material, but the loss of those trademarks, with the exception of 13 "McCormick," "Lawry's," "Zatarain's," "Club House," "Ducros," "Schwartz," and "Vahine," would have no effect on the company. Anti-­‐Trust Issues •
Keeping in mind that Heinz is located in only certain areas of world, including Asia, North America and certain parts of the Europe, although reliable and well known, we are a relatively small company when compared to our leading competitors such as Craft and General Mills. McCormick is a global leader in flavor, with the manufacturing, marketing and distribution of spices, seasonings mixes, condiments and other flavorful products to the entire food industry – retail outlets, food manufacturers and food service businesses and wants to take a new direction through expanding. By acquiring McCormick, Heinz will be able to better compete in the global free enterprise system with other international competitors as well as local competitors in the food industry. The Department of Justice and the Federal Trust Commission have nothing to worry about because the joining will not take over the market, but rather level the playing field on an international level. Information Technologies Heinz •
Heinz is a company dedicated to the sustainable health of people and the planet and has spent substantial time inventing new products to further that mission. Currently the company has invented a new product that can be added to food such as rice to combat iron-­‐deficiency anemia, a health threat that impairs infants and increases their chance of death before age 5. To help combat this illness we have created a non-­‐profit Heinz Micronutrient Campaign which provides the nutritious powder with nutrients to 5 million children in 15 developing countries. Heinz has also made an initiative to cut our greenhouse gas emissions, solid waste, water consumption and energy usage by at least 20% by 2015. Currently the company is making good progress and may even pass annual goals to be more eco-­‐friendly. 14 McCormick •
McCormick is a company driven by expanding into new markets. They do this by developing new products in research laboratories and product development teams, as well as occasionally using consumer proprietary formula. Currently, their mission is to develop more healthy products and 1/3 of their product development has to with healthy living involving reduced sugar, salt-­‐free, higher antioxidants and more natural resources. Combined Technological Advances •
Together, both McCormick and Heinz will be able to reach their expansion goals while helping the world on a global scale. Currently both companies are focusing on being more eco-­‐friendly and beneficial to humanity. We will develop new healthier products that will promote healthy living by having reduced sugar, salt-­‐free and other beneficial factors. The newly formed company will reach out to other nations not yet impacted by our charity work and help produce solutions that will benefit everyone. These solutions include adding various nutrients to our products and creating new products to further advance the company and help the global community. Together the two companies will have more resources to tackle pressing environmental issues such as the emission of greenhouse gases. The company can do this by cutting greenhouse gas emissions, solid waste and water consumption, while using Heinz’s model of containers created by using recycled plastic and plants. Overall, the we will become the leader for a greener, healthier world. 15 Financial Data 16 Heinz Income Statement 12,000,000 U.S. Dollars (in thousands) 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2008 2009 2010 2011 Total Revenue 9,885,556 10,011,331 10,494,983 10,706,588 Gross Profit 3,680,000 3,569,256 3,794,306 3,952,540 Operaong Income 1,568,000 1,502,446 1,559,228 1,648,190 844,000 937,961 882,343 1,005,948 Net Income General trends in Heinz’s income statement are indicative of slow but steady growth. Net and operating incomes have stood strong throughout the crisis, net income growing at around 9% while operating income dropping about 5%. While Heinz has been in good financial standing since 2008, negative fluctuations can be traced to changes in consumer wealth post-­‐crisis. As stated in our business risks, because of the price of what is perceived as a luxury brand, Heinz ketchup sales decreased during these past years. However, due to the diversification of our products, and our efforts to expand to emerging markets in China and Brazil through Quero and Foodstar, total revenue and gross profit has been growing consistently through 2011. 17 Heinz Balance Sheet 14,000,000 U.S. Dollars (in thousands) 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2008 2009 2010 2011 Total Current Assets 3,325,000 2,945,021 3,051,125 3,753,542 Total Assets 10,565,000 9,664,184 10,075,711 12,230,645 Total Current Liabilioes 2,670,000 2,062,846 2,175,359 4,161,460 Total Liabilioes 8,677,000 8,385,079 8,127,215 9,048,179 Total Equity 1,887,000 1,279,105 1,948,496 3,182,466 Heinz’s balance sheet trends display our commitment to expansion and growth. Recent acquisitions of the Quero and Foodstar brands have caused us to take more liabilities. However, the values of our total assets and equity have increase as a result of these acquisitions. Furthermore, the costs of creating/leasing factories in these regions are included in these numbers. While these recent transactions have caused us take on more debt, our debt to equity ratio is .997 which is well below industry averages. 18 Heinz Cash Flow 2,000,000 1,500,000 U.S. Dollars (in thousands) 1,000,000 500,000 0 -­‐500,000 -­‐1,000,000 -­‐1,500,000 2008 2009 2010 2011 1,188,000 1,166,882 1,262,197 1,583,643 Cash from Invesong Acovioes -­‐554,000 -­‐761,194 13,443 -­‐949,632 Cash from Financing Acovioes -­‐758,000 -­‐516,336 -­‐1,147,916 -­‐482,509 -­‐35,000 -­‐244,542 110,108 241,058 Cash from Operaong Acovioes Change in Cash & Cash Equivalents Heinz’s cash flow statement has fluctuations in multiple areas; however cash from operating activities has had stable growth since 2008. Furthermore, in 2010 and 2011, Heinz has more cash and cash equivalents, which is representative of our ability to finance the acquisition of McCormick. 19 McCormick Income Statement 4,000,000 3,500,000 U.S. Dollars (in thousands) 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2008 2009 2010 Total Revenue 3,176,600 3,192,100 3,336,800 Gross Profit 1,288,200 1,327,200 1,417,700 Operaong Income 376,500 466,900 509,800 Net Income 255,800 299,800 370,200 McCormick’s income statement shows stable growth in all aspects of its income statement. Heinz’s acquirement of McCormick will add to our current growth trends. 20 McCormick Balance Sheet 4,000,000 3,500,000 U.S. Dollars (in thousands) 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2008 2009 2010 968,300 970,500 1,015,300 Total Assets 3,220,300 3,387,800 3,419,700 Total Current Liabilioes 1,034,100 818,200 834,800 Total Liabilioes 2,165,000 2,044,300 1,957,000 Total Equity 1,055,300 1,343,500 1,462,700 Total Current Assets McCormick’s total liabilities have decreased over the past years as a result of responsible debt management. However, Heinz plans to take on more debt in order to finance more investments to expand in to more emerging markets. Furthermore, some of this money will be used to finance the operational cost of merging the infrastructures of both companies. 21 McCormick Cash Flow 600,000 400,000 U.S. Dollars (in thousands) 200,000 0 -­‐200,000 -­‐400,000 -­‐600,000 -­‐800,000 -­‐1,000,000 2008 2009 2010 Cash from Operaong Acovioes 314,600 415,800 387,500 Cash from Invesong Acovioes -­‐747,000 -­‐81,800 -­‐129,700 Cash from Financing Acovioes 433,400 -­‐341,800 -­‐261,100 -­‐7,000 600 11,300 Change in Cash & Cash Equivalents McCormick’s cash flow statement has many fluctuations that may cause a concern with respect to the acquisition of their company. However, it is important to note that the cash from operating activities has been stable after the 2008 financial crisis. 22 McCormick EBITDA 1,400,000 1,200,000 U.S. Dollars (in thousands) 1,000,000 800,000 600,000 400,000 200,000 0 EBITDA 2008 2009 2010 619,400 747,000 $1,193,100 McCormick’s EBITDA trends are indicative of future growth. Between 2008 and 2010, McCormick’s EBITDA has grown 573,700 or 92%. Heinz’s acquisition of McCormick will guarantee growth in the coming years. 23 Historical Stock Analysis: Heinz (HNZ) Heinz’s value on the market has increased steadily since the crash of 2008. Since it dropped to a low of $31.23 on March 2, 2009, the stock has increased 2,253 points to date. This increase has moved Heinz’s market value past its stock price before the recession. The resilience and quick recovery in the market reflects Heinz’s diversified products in the international market. While some analysts say that growth in the markets after the recession have been artificially influenced by stimulus packages by the government, the food processing industry does fall under this analysis. Because Heinz generates revenue through sales of physical goods, the notion that Heinz’s growth has been artificial is false. Heinz has grown at a rapid rate, and shows no sign of slowing down. Heinz’s EPS is $3.06. Furthermore, we pay quarterly dividends to stock holders. 24 Historical Stock Analysis: McCormick (MKC) McCormick’s share price has increased significantly since the crash of 2008. It has increased about $20 and has no shown no signs of slowing down. Like Heinz, McCormick’s resilience in the markets has to do with their diversified products and international markets. McCormick’s growth goes hand in hand with growth for the newly merged company. The EPS is $2.87 and they pay quarterly earnings as well. 25 Heinz + McCormick Proforma H. J. Heinz McCormick Combined Net sales $ 10,706,588 $3,336,800 $14,394,472 Cost of sales $6,754,048 $1,919,100 $8,499,685 Gross Profit $ 3,952,540 $1,417,700 $5,894,786 $2,304,350 $907,900 $3,148,005 R & D Development -­‐ $52,700 $52,700 Total Operating Expenses $ 2,304,350 $960,600 $3,199,651 Operating income $ 1,648,190 $1,098,000 $2,814,844 Interest income $22,565 -­‐ $22,565 Other income/(expense), net $(21,188) $2,200 $(18,988) Interest expense $275,398 $49,300 $324,698 Net Interest $ (231,645) $(47,100) $(278,745) $ 368,221 $118,000 $476,496 Net Income $ 1,296,200 $370,200 $1,708,060 Depreciation and amortization $ 298,660 $95,100 $393,760 Reported EBITDA $ 1,946,850 $1,193,100 $3,208,604 Selling, General, and Administrative Costs Provision for income taxes/Taxes on earnings Proforma (Amounts in thousands) 26 Proforma: The newly merged company of Heinz and McCormick is projected to do very well in the coming years. The multiple synergies for reducing operation expenses and increasing revenue have actually been projected to result in a 4.5% increase in EBITDA (earnings before interest, taxes, depreciation, and amortization) from the basic combination of the reported EBITDA values of both companies. The reported EBITDA value for Heinz is approximately $1.94 billion, and the reported EBITDA value for McCormick is about $1.19 billion. The aggregate of these two numbers is $3.14 billion. However, the projected EBITDA value for the newly merged company is $3.21 billion which comes out to a precise 2.2% increase in EBITDA value. This projected increase is the outcome of all other increases in income values such as sales, interest and other income, and net earnings. Not only is it credited to an increase in those values, but decreases in various expense values are also taken into account. For example, the cost of sales has been assumed to decrease by 2% because as a new combined company, McCormick & Heinz are able to reduce multiple operational costs due to their similar product lines. A merger allows these two companies to combine factories in the same areas. This reduction in factories in turn decreases depreciation and amortization costs by an assumed 2% because by shutting down some of their common factories to combine them, cash flow is going to increase, thus decreasing reported amounts paid. While we project much larger growth in the coming years, in the year immediately after the merger will see a small 2% reduction in these costs through the streamlining of operating expenses. There are certain other expenses that will increase considering that a merger will significantly expand each company from its original size. Selling, general, and administrative costs are expected to increase by at least 5%: in terms of selling, the new merged company will have considerably more to sell internationally as well as domestically; general expenses cover, for example, employment expenses: a merged company will have a lot more employees to handle, thus costs will go up; in terms of administrative costs, most of the C-­‐level office positions have remained from both McCormick and Heinz. Therefore, this expense will go up to fund for their salaries and other components. So far, the numerous increases and decreases in costs lead to an overall projected 2.5% decrease in total operating expense. Such a decrease is very beneficial to the new McCormick & Heinz merged company in the sense that it enables the company to save up for alternate investments which can in turn help to increase revenues. 27 Additional benefits for a merger between Heinz and McCormick are that operating income is expected to increase by approximately 2.5%. Merging these two companies will create a lot more efficiency in operations and will reduce operational costs because of the synergy of reducing the number of factories and combining them domestically and internationally. In terms of interest, interest income is assumed to increase by only 2.5% due to all the increased incomes from the merged company. Taking into account all these factors, McCormick & Heinz are envisioned as a very profitable company. Their 2.2% increase in EBITDA is a definite sign of slow, but sure success. It will bring more cash and profits into the company, resulting in higher stock prices and giving back more to the shareholders as a result. To quantify the benefits of this merger for the shareholders, we predict a 2 year period before the diluted stock EPS, due to our 88% payment in stock, will reach the EPS pre-­‐
acquisition. Dividends will be maintained at current Heinz ratios. 28 Heinz SWOT Analysis Strengths: Weaknesses: Classic American icon; brand loyalty Sales dependency on Wal-­‐Mart (11%) evident Influenced by fluctuations in foreign Ketchup exchange rates Constantly expanding to emerging markets Global economic dependence Diversified products and brands Dependence on consumer wealth to Significant presence in the international profitability food industry Slight seasonal dependency Respectful of EPA and FDA regulations Sales unaffected by 2008 financial crisis Steady growth despite global economic downturn Weak U.S. dollar bolsters exports Environmental friendly reputation No pending litigations Opportunities: Threats: New product opportunities: Generic & private label brands micronutrients Euro crisis Ventures into emerging markets Danger of U.S. default on debt 29 McCormick SWOT Analysis Strengths: Weaknesses: Footholds in Canada, US, Mexico, UK, Misallocation of marketing funds France, China, Australia: Internationally Environmentally unconscious based Highest sales only in the seasons Old company with strong holds on market Strong branding Strong employee/executive relations No pending litigations Steady growth in revenue and profits since 2008 1.45 Debt/EBITDA: Able to pay off debt Opportunities: Threats: Expansion into Poland and other emerging Generic & private label brands markets Global Economy: Euro Crisis Acquiring strong trademarks Possibility of U.S. defaulting on debt New marketing strategies (reallocation of funds) 30 Strengths: Weaknesses: Brand loyalty Influenced by fluctuations in foreign International presence in more than 115 exchange rates countries Global economic dependence Constantly expanding to emerging markets Dependence on consumer wealth to Diversified products and brands profitability Respectful of EPA and FDA regulations Weak U.S. dollar bolsters exports More leverage of suppliers and retailers Efficient marketing campaigns Minimal seasonal dependency post-­‐merge No pending litigations Award winning human resource department Farmer/corporate relations Opportunities: Threats: New product opportunities: Generic & private label brands micronutrients Euro crisis Ventures into emerging markets Danger of U.S. default on debt Innovative marketing ideas: bundle packaging and dual recipe advertisement 31 Closing Remarks This merger will be beneficial to not only the H.J. Heinz Company itself but also to the shareholders, our employees, and our consumers. The transaction will allow us to reach out around the globe and, because of the independence of the McCormick and Heinz names, bring us even higher brand recognition domestically. Additionally, the merger will allow the new company of McCormick & Heinz to more effectively exist and bring us closer to becoming true competitors with food industry giants such as Kraft, Campbell, and General Mills. H.J. Heinz has and always will continue to be a top leader in the food industry and, as always, will continue to bring you promise, profit, and progress. Thank you for your support. 32