What does Warren Buffett see in Heinz?

Warren Buffett, history's greatest investor, has made billions finding value in companies that Wall Street has overlooked. H.J. Heinz (HNZ), which Buffett's Berkshire Hathaway (BRK.A) and 3G Capital Thursday agreed to buy for $23 billion, is a case in point.

Heinz, best-known for making ketchup, was hurt when consumers turned to cheaper, private-label packaged foods as the economy began to sour. During the latest quarter, the Pittsburgh company reported that North American consumer product sales rose 0.1% to $795 million while operating income plunged 5.7% to $190 million on higher marketing expenses. CEO William Johnson saw his total compensation drop 8% to $14.4 million in 2012, according to The Associated Press.

Billionaire Nelson Pelz won a seat on the company's board in 2006 following a proxy fight and had been pressuring the company to sell assets to boost its share price. One area where Heinz listened to the activist investor was in making ketchup packets easier to open. The new packet design, unveiled in 2011, was such a hit that The Wall Street Journal reported that some customers were hoarding them.

Heinz's businesses have shown pockets of strength in the food service industry and in emerging markets. They also have iconic brands that Buffett has liked. Heinz Tomato Ketchup was first introduced in 1876. The company also sells Ore-Ida potatoes and Classico pasta sauce. 

Evidently, Buffett and 3G Capital like what they see. According to Bloomberg, they are paying about 14.6 times earnings before interest, taxes, depreciation and amortization, well above the 7.6 times multiple paid in similar deals. Shares of other food companies, such as Campbell Soup (CPB), are rising as well.

Buffett has made other bets in consumer products, with holdings in Coca-Cola (KO), Johnson & Johnson (JNJ) and Kraft Foods (KRFT). He helped Mars Inc. in its $28 billion takeover of chewing gum maker Wm. Wrigley Jr.

Based in Brazil, 3G Capital, is no stranger to the food business either and will manage the operations of Heinz when the deal closes. It acquired Burger King (BKW) in 2010 for $3.3 billion and took the fast food chain public last year.  

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

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