Sunday, March 05, 2006

Is It Any Wonder that HNZ Shareholders Seem Discontent?

Recently, I did a brief post on Heinz, mentioning the rumors that were circulating at that time about Nelson Peltz and his potential involvement.

Value Discipline post

Well, the rumors were confirmed on Friday as the CEO of Heinz began a campaign to retain his board and oppose Mr. Peltz’ slate.

Heinz fights back by claiming fundamentals are strong

While Mr. Peltz has enjoyed great success recently with his involvement in Wendys, getting three seats, as well as acceleration of Wendy’s spin-off of Tim Horton’s and the potential spin-off of Baja Fresh. . Apparently, he has also been very influential in the soul-searching and shareholder value investigation that is currently taking place at Cracker Barrel.

As I mentioned in my earlier post, this will not be an easy battle in my opinion. As I had mentioned in my prior post:

From a governance standpoint, the company has an 80% super-majority vote requirement to make certain governance changes. Given its Pennsylvania incorporation and the PA legislative propensity to quash minority shareholder rights as demonstrated to Relational Investors recently in its lawsuit against Sovereign Bank (SOV), this could be a very nasty battle of pyrrhic proportions.Pennsylvania Bill aids Sovereign

Bill Johnson, the CEO of Heinz speaks of the return of capital to shareholders that has been achieved. The share buybacks and increased dividends certainly demonstrate improved attention to shareholders. Share buybacks on a TTM basis have been (net of share issuance) $1.4 billion. This compares to the prior corresponding period’s $365 million. Similarly, the dividend has grown to 30 cents per share quarterly from its prior 28.5 cents quarterly.

Shareholders may be more willing to pay attention to Mr. Johnson’s arguments had he retained a significant equity position in his company. It is difficult to listen to someone who tells you how much better it is for you as a shareholder when last month, Mr. Johnson sold 262,488 shares of stock for proceeds of $9.25 million. In fact, in the last twelve months, only one purchase of HNZ stock in the open market by an insider, the CFO, for a grand total of 1,000 shares. If you really think I should be a Heinz shareholder who entrusts this management with shareholder value creation, shouldn’t you believe your own story or as Buffett says, eat your own cooking?

Return on invested capital at HNZ has meandered over the last several years. When Bill Johnson took the responsibility for capital allocation as CEO in 1998, the ROIC was 16.1%. By astute management, creation of shareholder value (ahem), and restructuring, the ROIC took the following trajectory:
1998 16.1%

1999 11.1%

2000 7.7%

2001 11.3%

2002 13.1%

2003 9.3%

2004 12.1%

2005 12.0%

Q1 06 11.3%
Q2 10.4%
Q3 8.9%

Is it any wonder that HNZ shareholders seem so discontent?

I have totaled Mr. Johnson’s salary, bonuses, and “other comp” since 1988. This does NOT include restricted stock awards and other stock related compensation. The total of salary plus bonus compensation per my calculation is $19.95 million.

Is it any wonder that HNZ shareholders seem so discontent?

The price of HNZ stock as of Friday’s close was $38.23. The price of HNZ stock (adjusted for dividends reinvested) as of April 30th, 1998 was $38.97.(Calculations per Yahoo Finance) Essentially, no return for eight years!!!

Is it any wonder that HNZ shareholders seem so discontent?

The company, as a result of its recent divestiture program, will have some $2.5 billion in cash to deploy. The current enterprise value for the firm is $17.5 billion.

Who will shareholders want to deploy this capital?

Neither I, nor my family, nor clients have a position in Heinz. This will be an interesting battle to watch!


At 9:33 PM, Blogger Dan O'Leary said...

Lever the sucker up and take it private. Why the hell not? The multiples allow it these days anyway.
Please note my sarcasm


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