Heinz Battle Offers Primer On Proxy Fights

Ketchup can often be a messy business. This month’s clash for control of Heinz Co. was no different.

All summer long, corporate governance activists have watched the $8.6 billion food giant wage a vicious proxy fight against the Trian Group, a hedge fund headed up by financiers Nelson Peltz and Peter May. The battle reached its zenith on Aug. 16, as shareholders voted on whether to elect any of Trian’s five nominees for the board of directors.

Final results won’t be known until mid-September, but Heinz already concedes that at least one, and possibly two, Trian nominees won seats on the board. Nevertheless, both sides are now proclaiming victory in an episode full of lessons in shareholder activism.

Heinz, not surprisingly, hailed the slim number of successful Trian nominees as proof that its efforts to stimulate faster growth and enhance shareholder value have strong support from stockholders. On the other hand, says Robert McCormick, a vice president at proxy research firm Glass, Lewis & Co., Trian did remarkably well considering it owned barely 5 percent of Heinz stock. Trian itself issued a statement saying, “This is a big victory for all Heinz shareholders. There is clearly a desire for positive change at Heinz.”

The numbers support Trian, given that Heinz’ stock surged about 20 percent since rumors first started in February that Trian was accumulating a position in Heinz, and the company wound up agreeing on a slew of changes to boost its performance and corporate governance practices. Even so, most observers of the battle agree that both sides made critical mistakes, preventing either from securing an even more substantial victory.

Going Public, Making Plans

The most distinctive features of the battle were intensive public relations offensives; both Heinz and Trian fired off near-daily emails to investors, the media and any other interested parties. When Heinz issued ketchup bottles in July with labels urging people to oppose Peltz, he soon responded in kind with bottles of his own labeled in support of Trian. Both sides also touted their director slates to influential proxy research firms, and rolled out strategic plans for the company’s future.

Julie Gozan, director of corporate governance for Amalgamated Bank, which owns about 120,000 Heinz shares and supported Heinz’s entire director slate, dismissed much of the publicity battle as irrelevant to large investors. “I’m not sure PR played a big role here,” she says. “It was not won on the basis of PR.”

Likewise, McCormick says, “We didn’t talk to either side. We have a strict policy” against doing so.

Meanwhile, both sides girded for a protracted fight. In late May, for example, Trian published a 21-page manifesto titled, “Results Speak Louder Than Words: A Plan to Enhance Value at Heinz.” In it, Trian called on Heinz to launch a major stock repurchase program and a higher long-term target dividend payout ratio, cut annual costs by at least $575 million, drive growth by reinvesting those funds in consumer marketing and product innovation, and divest certain brands and geographical markets.

A week or so later, Heinz unveiled its own plan, calling for $355 million in cost reductions, $145 million in reduced trade spend, $1 billion in additional share repurchases over 2007 and 2008, a 16.7 percent increase in the dividend to $1.40 per common share and 10 percent earnings per share growth for 2007. Trian quickly issued another statement, claiming that the Heinz plan bore “a significant resemblance” to the Trian plan.

Peltz

On June 22 Trian filed a preliminary proxy statement. It also named its five director nominees: Peltz and May; Edward Garden, Peltz’ son-in-law, and a portfolio manager and founding partner of Trian; Greg Norman, the professional golfer and an entrepreneur; and Michael Weinstein, a former chief executive of Snapple Beverage Group.

Heinz filed its proxy on July 10, and 10 days later announced several governance changes—including a commitment to add up to two additional independent directors to the board, and to adopt majority voting in the election of directors. It also recommended that Heinz shareholders reduce supermajority voting provisions from 80 to 60 percent, pledged to seek shareholder approval within one year of adopting a shareholder rights plan, and promised to hold regular meetings between its independent directors and key shareholders. Those concessions scored critical points with institutional investors and proxy research firms.

Gozan

“The issues Peltz raised had to be raised,” Gozan says. “But we didn’t feel the dissident slate was a better long-term option. The Heinz slate was more responsive to adopting key governance reforms.”

Heinz received support from numerous unions and union-related investment funds, as well as proxy research firms including CalPERS, Amalgamated Bank, Taft-Hartley Advisory Services (a division of Institutional Shareholder Services), Egan-Jones Proxy Services and CtW Investment Group. How Heinz’ largest shareholder, Capital Research and Management, voted is unclear.

At the time it pledged its support, CtW Investment Group lauded Heinz’ “detailed, credible business plan that does not alter the company’s risk profile” and its commitment to add two independent directors with food industry experience. CtW itself owns no Heinz shares, but works with many institutional funds that do keep stakes in the company.

Egan-Jones raised questions about Trian’s proposed cost-cutting plan, which it asserted lacked details and appeared drastic and somewhat superficial.

Splitting Proxy Service Support

Heinz, however, seemed jolted when three major proxy advisory firms—ISS, Proxy Governance and Glass Lewis—failed to line up behind all of its nominees. Instead, all recommended that investors split their votes. ISS, for example, recommended that investors support Peltz, Norman and Weinstein, noting that the dissidents would bring consumer marketing expertise and “keep management’s feet to the fire.”

Still, the proxy research services were also skeptical of Trian’s gang of five, saying that they were close to Peltz, rather than potentially individual, independent directors. Glass Lewis pointedly said: “In our view, shareholders should seriously worry that the dissident’s nominees would constitute a distinct clique, with its own agenda.”

Experts say the outcome could have been different if both sides acted differently. For example, had Heinz acted more aggressively to enhance shareholder value before an outsider pushed it to do so, there probably wouldn’t have been a proxy fight. “You shouldn’t wait before a fire is lit to right the ship,” Gozan warns. “It shouldn’t take an activist hedge fund to oust a board.”

“Boards should listen to shareholders before there is outside pressure,” adds Shirley Westcott, managing director of policy for Proxy Governance.

For Peltz’s part, Gozan says that just because a group pushes a company to boost its value and governance, that doesn’t necessarily mean the group should lead the company. “There are a lot of roles dissidents can play,” she says. “They can be a shareholder engaging the company.”

McCormick

Experts also say Peltz might have won more board seats if his nominees were truly independent of one another, or unaffiliated with Trian. “If you propose a [dissident] slate, you are better off looking at candidates independent of each other and the sponsors,” McCormick says. “You are more likely to get support.”

By mid-September, Heinz will announce the official results of the voting. Then, the one or two Trian nominees who presumably won enough votes will begin serving on Heinz’s board. Says Randy Lampert, co-head of investment bank Morgan Joseph’s newly formed shareholder activist group: “When you win a proxy fight, it is the end of one battle and the start of a new one—in a new venue.”