Tuesday, April 25, 2006

Heinz-The Battle Begins

Well, yesterday Trian Fund Management finally filed its 13D announcing that it had assembled a position of 18,425,000 shares of Heinz (HNZ) representing 5.4% of the company.

Trian, controlled by Nelson Peltz in conjunction with Peter May and Edward Garden is operating in conjunction with Sandell Asset Management, and Castlerigg International, funds controlled by Thomas Sandell.As the filing states, the total investment of Peltz' group was $475 million and the Sandell Group was about $200 million.

The Trian filing states that as of March 2nd of this year, a letter was delivered to HNZ informing it of its intention to nominate five candidates to the board. On March 13th, Peltz met with William Johnson, the HNZ CEO to inform Johnson of their "status as significant shareholders" and to "express certain operational improvements and changes in strategy that the Filing Persons would like to see implemented." In a subsequent meeting held March 29th, Peltz, May, and Garden met with members of the HNZ senior management team to "discuss ideas to enhance shareholder value." According to an investment banker advising HNZ, HNZ management was positive about the discussions and the Board representation was being considered.

By April 6th, Trian was informed that the Board's Corporate Governance Committee had rejected the request for Board representation. This morning Heinz denies that it had rejected the Trian Board request.

What is interesting to me is that Peltz et al had not owned a single share of HNZ prior to February 28th when they began to assemble their position via a series of privately negotiated back to back call purchases and put writes. Clearly, by assembling the right to purchase stock rather than the stock itself, Trian avoided the obligation to file earlier. Also of note, the agreement between Trian and Sandell allocates purchases up to $660 million on a 70/30 basis Trian/Sandell. Above $660 up to $860 million is allocated to Sandell. Anything above $860 is allocated to both on a pro-rata basis.

Trian clearly has the upper hand as far as final approval on virtually all matters including proxy voting, director nominations, etc. Strangely, "Sandell shall pay 75% of all expenses incurred by the parties in furtherance of the activities engaged in by the parties..."

Also of interest is the termination of the Trian/Sandell agreement "which will terminate at the conclusion of the next annual meeting of the Company's shareholders (including any adjournments or postponements.)"

In short, at least in my opinion, this bears the marks of an opportunistic raider. Not exactly someone whose interests are aligned with those of the long-suffering shareholder, again in my view. The termination date of the Agreement speaks volumes of long-term interests.

The case against HNZ management is very strong as I outlined in a prior post:

Is It Any Wonder that HNZ Shareholders Seem Discontent?

But until the plans for shareholder value creation are revealed, I see little reason for shareholders to applaud the merits of this vague filing. A short-term investment pass based on an agreement that sunsets with the annual meeting hardly describes someone who is looking for a long term solution.

Disclaimer:Neither I, my family, nor my clients have a position in HNZ.


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