3G Capital is looking to reload after taking big bites of burgers and ketchup.
The private equity firm that teamed with Warren Buffett's Berkshire Hathaway (BRK.A) to acquire condiment king Heinz, and, more recently, executed an inversion deal to move its Burger King chain's headquarters into Tim Horton's (THI) Canadian home, is reportedly eyeing up to $5 billion to make big deals, the Wall St. Journal recently reported.
Banking sources say they are thrilled: private equity firms have been standing around with their hands in their deep, deep pockets, still smarting over bad bets that preceded the financial crisis.
"All I know is, our clients seem really, really eager to lend," said one source working on commercial origination for institutional clients.
Unfortunately for those lenders, they have been shut out of the PE pipeline because the U.S. Treasury Department limits big banks such as Goldman Sachs & Co. (GS) to only allow private equity bidders to spend six times of the target's Ebitda to make a deal -- and not a penny more. Some PE pros complain they have been sidelined by the regulations, but BC Partners, the U.K. PE firm that bought PetSmart (PETM) in a late 2014 deal, successfully placed enough of its debt for the pricey transaction with international buyers -- and out of the purview of the penny-pinching Treasury officials.
Now, TheStreet turns to its sources to speculate on what 3G Capital could buy next -- although, the Journal's report offers, it could still be years away from that big buyout.
1. Kellogg Co.
Early indicators pointed to Kellogg (K) being a potential buyout target -- which, for a company focusing on consumer products and food items in the past, seems to make sense. With an Ebitda of $3.3 billion, 3G Capital likely wouldn't be able to set up a buyout for Kellogg within the Treasury's 6x rule, but then again, if it structured a deal as BK Partners did with its PetSmart buyout, it might not matter. As long as enough of the debt is structured off-shore, the likelihood that 3G will spend north of 6x to buy Kellogg probably wouldn't run into any opposition from Treasury. Kellogg's market cap of more than $22 billion would mean a 3G deal would make for the biggest pure-play PE post-crisis buyout, as well.
Private equity pros have batted around rumors for years that Staples (SPLS) -- a successful growth story from Mitt Romney's Bain Capital days -- may ultimately be taken private, once again. Between competitors like Amazon (AMZN) entering its territory and smaller companies like Office Depot (ODP) and OfficeMax merging to form a stronger alliance, Staples may finally be in need of a white knight. With a more manageable Ebitda of $1.38 billion, Staples' LBO -- were 3G to pursue it -- could also be financed in the U.S., perhaps making it more appealing to the potential buyer.
PepsiCo (PEP) was suggested in the Journal's write-up as being a potential target of 3G, but it appears to be a very lofty goal. As with Heinz and Burger King, 3G would inevitably need to team with a big partner (as it did in the past with Warren Buffett) to get the deal done. A market capitalization of $140 billion and Ebitda north of $12 billion means a partner likely bigger than Buffett -- possibly, Anheuser Busch Inbev (BUD) , which has already agreed to purchasing as well as distribution plans with PepsiCo.
There are a number of candidates that a reloaded 3G Capital could target with a $5 billion buyout fund. One, which the Journal highlights in its report, is Kraft Foods (KRFT) , which just saw its board vote to replace ex-CEO Tony Vernon with a new executive, John Cahill. But with its $40 billion market capitalization, trying to push the company to deal off some of its brands might prove more manageable for the sponsor. Activist investors have been less likely to block simple divestitures, unlike outright LBOs, and other consumer products conglomerates, such as Procter & Gamble (PG) , have successfully made big brand sales. Others in this category include Nestle, which has already been selling some brands, and Unilever (UL) .
5. Campbell Soup
At a market capitalization of about $14.5 billion and with an Ebitda of nearly $1.4 billion, Campbell (CPB) might appear to be a primary target for a number of reasons. The Journal quoted sources suggesting Campbell could be bought by 3G, and it does in fact appear to be more of a PE pure-play. The company's shares have lagged the pace of the market for more than a year, and its attempt to reintegrate itself into daily American consumers' lives in the form of a rebranding campaign fell flat. With South America -- and 3G's Brazil -- regularly eyed as a potential growth market, buying out Campbell would provide as much of a solution for the company and its existing shareholders as it would for a private equity firm with a fresh $5 billion burning a hole in those deep pockets.