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Who's Really Shaking Up Heinz


Shares of H.J. Heinz (HNZ) had been on the skids for years when hedge fund activist Nelson Peltz stepped in, buying a 5.4% stake in the ketchup giant last March. Fresh off his fight at restaurant chain Wendy's International Inc. (WEN), Peltz, founder of Trian Fund Management, almost immediately launched a nasty proxy battle to oust five directors. When the dust settled, Peltz and an ally, former Snapple Beverage Group (TRY) CEO Michael F. Weinstein, had muscled their way onto the board.

Now the stock has bounced back, up more than 25% since Peltz's arrival a year ago. What's more, revenues at Heinz rose 6%, to $6.6 billion, for the first nine months ending Jan. 31, while profits increased 27%, to $605 million.

On the surface, it would seem to be the usual tale: Activist buys shares, activist clamors for change, activist cleans up company. But Peltz, who on Feb. 26 disclosed that his fund now owns a 5.5% stake in jeweler Tiffany & Co. (TIF), doesn't get the kudos in this case. "Trian just deserves credit for identifying an undervalued stock," says Deutsche Bank (DB) analyst Eric Katzman, who notes that Peltz's contribution to Heinz's turnaround has been "minimal." Peltz declined to comment.

This time, management gets the pat on the back. Chief Executive William R. Johnson, who became CEO in 1998, has spent the past couple of years spiffing up the company by dumping underperforming units like StarKist Tuna and Heinz pet food while slashing costs and reducing customer discounts to the tune of $500 million a year starting in mid-2008. He's plowing those savings back into product development and marketing, as well as restocking the executive suite with consumer-product heavyweights from Procter & Gamble (PG), PepsiCo (PEP), and Mattel (MAT). The strategy has paid off, especially in Heinz's mainstay, ketchup. New products, like the easy-to-store Heinz Fridge Door Fit Ketchup, as well as attention-grabbing gimmicks like labels consumers can customize over the Web have brought buzz to a once-tired brand. Driven by such efforts, ketchup and sauce sales rose 6% in the past three quarters.

Johnson has kept on track despite a distracting slugfest with the hedge fund manager. The battle turned personal last May when Heinz issued a press release complaining that Peltz's nominees were all close friends, employees, or relatives. Heinz attacked again a month later, pointing out Peltz's prior misdeeds, such as a lawsuit he settled for $70 million and a public censure from the London Stock Exchange. Peltz issued his own press release, calling the charges "misleading, baseless, and self-serving," while blasting Heinz's financial record under Johnson as "abysmal." He then fired back with a list of seven Heinz directors involved in shareholder lawsuits at other companies. Heinz brushed off the charges as run-of-the-mill litigation. With the fight intensifying, the Securities & Exchange Commission warned both sides over the summer to ease off the mudslinging in proxy filings.

DETENTE

Meanwhile, Johnson crisscrossed the globe, trying to assuage other major shareholders and bolster employee morale. At a meeting with staffers last June in London, Johnson made only a single reference to the Peltz matter in his 20-minute speech: "The best thing you can do for Heinz is to keep growing your brands."

In the end, Johnson embraced his adversary. These days, the two often talk by phone about ideas or concerns. While analysts once worried Peltz might push short-term moves to boost the stock--like drastic cost-cutting at the expense of long-term investment in product development--Johnson says that hasn't been the case: "He's been collegial and collaborative. The focus is on new ideas to drive innovation and create value."

Indeed, innovation has become a focal point, which should help fuel growth, especially in the sluggish European division. The company plans to launch 200 new products, including a line of Ore-Ida roasted potatoes in fiscal 2008, which begins in May. In all, earnings per share are expected to rise 10% this fiscal year and 8% more in the next.

It's not only investors who now find Heinz appealing. UBS (UBS) analyst David Palmer thinks Kraft Foods Inc. (KFT), which will be fully spun off from cigarette maker parent Altria Group Inc. (MO) in March, may set its sights on Heinz. "Heinz would be on a very short list of companies that would add significant international presence for Kraft," Palmer says.

Johnson isn't distracted by the noise: "We are focused on running our company...and creating shareholder value through better organic results.

By Aaron Pressman


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