Kraft-Heinz: Is This Really a Buffett-type of Deal?

When I think of Warren Buffett, I think of a guy who likes to own stakes in iconic brands which throw off reliable amounts of cash flow.  I also think of a guy who likes to watch his ownership stakes increase:  as his portfolio companies buyback their shares, his percentage ownership of those companies increases.    Buffett mentioned as much in his recent Berkshire Hathaway shareholder letter.   Something else Buffett always mentions is how he prefers to acquire companies using cash rather than using Berkshire Stock (BRK – no positions) as currency – because he thinks that BRK usually offers more value than the company he is acquiring: “We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give.”

So it surprised me to see that in today’s acquisition of Kraft Foods ($KRFT), Heinz equity was being used as currency.   It’s not quite that simple, so let’s take a quick look at the situation.   In Feburary of 2013, Warren Buffett and 3G capital acquired Heinz in a deal worth $ 28B (including debt).  Buffett and 3G each bought 1/2 of the equity, and Buffett also bought a preferred equity stake that paid him a fat dividend.

This morning, 3G and Buffett announced the Kraft acquisition – it’s structured as a merger with Heinz, with Kraft shareholders owning 49% of the new company and legacy Heinz shareholders (read: Buffett and 3G) owning 51%.  In addition, Kraft shareholders will receive a special dividend funded by  a $ 10B equity investment by Buffett and 3G.

So from Buffett’s point of view: yesterday he owned 50% of Heinz and 0% of Kraft, and when the deal closes he will own roughly 25% of Heinz and 25% of Kraft.  He’s essentially done the opposite of what he normally likes to do in deals: he’s used stock as currency instead of cash.   (edit: the 51%/49% split is post-$ 10B equity investment, I believe:)  Before continuing, we need to note the obvious caveat:  Buffett and 3G are investing $ 10B in the company to fund the special dividend, which will alter those percentages I just gave – but the concept remains: Heinz equity is being used to acquire Kraft equity.

What conclusions do we draw from this?   Did Warren Buffett and 3G want to get out of Heinz?    Buffett was on the record last year as saying he wanted to buy *more* of Heinz – so that seems like an unlikely motive.  Is Kraft such a gem that Buffett was willing to give up a part of a company he loved (Heinz) in order to get involved in it?  Possibly…   In today’s low-interest-rate cash-rich financial world, though, it seems that it probably could have been feasible to get this deal done for all cash if the acquirers really wanted to, right? (EDIT: the press release does note that this deal structure will not increase the debt levels of the Kraft-Heinz company, which hints at why stock was used as currency instead of adding more debt)

just thinking out loud… I wonder if any of the mainstream journalists interviewing Buffett will ask him about this concept.



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