Tag: 3G Capital

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Kraft Heinz Minority Stock Positions Stock Portfolio

Kraft Heinz Likely Bidder for GlaxoSmithKline’s Horlicks

(BRK.A), (BRK.B)

GlaxoSmithKline is looking to find a buyer for its malted-milk brand Horlicks, as it raises funds for its $13 billion buyout of its consumer healthcare joint venture with Novartis.

Reportedly in the bidding for Horlicks is Kraft Heinz, as the drink is popular in the United Kingdom, Australia, New Zealand, Hong Kong, Bangladesh, India, and Jamaica.

Made from wheat, malt barley, sugar, milk and vitamins, the beverage dates back to 1873 when Horlicks was invented by two British-born men, William Horlick and his brother James Horlick from Gloucestershire, England. James was a chemist, working for a company that made dried baby food. William, the younger brother, had emigrated to the United States in 1869 and James decided to join him in Chicago in 1873. That same year, they started their own company, J&W Horlicks, to make a malted milk drink. They called their product ‘Diastoid’ and their advertising slogan read: ‘Horlick’s Infant and Invalids Food’.

The company that acquires Horlicks will have to cope with a decline in the popularity of malted-milk sector. In India, negative volume growth in the health food drinks segment was -6.8% in 2016-17, according to India’s The Economic Times.

“Horlicks is a terrific brand with a long history, especially in India,” GSK Chief Executive Officer Emma Walmsley noted at a recent investors’ meeting. “But in the context of funding for this (Novartis) transaction and our desire to increase focus on our over-the-counter and oral health portfolios, as well as other group capital allocation priorities, it makes sense for us to review it.”

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Charlie Munger Warren Buffett

Buffett Reveals Terms of Failed Unilever Bid

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Berkshire Hathaway and 3G Capital Partners’ recent unsolicited offer for Unilever may have flopped, but it hasn’t soured Warren Buffett on working with 3G on more acquisitions.

The two entities have worked together on the takeover of Kraft to form Kraft Heinz, and Berkshire provided financing for 3G’s merger of Burger King and Tim Hortons that became Restaurant Brands International. The merger made Berkshire a minority owner of the combined company.

At the annual shareholder’s meeting, Buffett detailed that both Berkshire and 3G were prepared to each put $15 billion into the Unilever transaction.

Some in the press have questioned whether 3G’s extreme cost-cutting made the deal unpalatable for Unilever.

While a shareholder questioned whether 3G’s emphasis on layoffs as part of its cost-cutting strategy was in line with Berkshire’s corporate culture, both Buffett and Charlie Munger noted that improvements in productivity have often lead to layoffs.

Munger noted that he doesn’t long for the days of elevator operators, and “We don’t want to go back to the days of subsistence farming.”

While Munger didn’t see a particular “moral fault” in 3G’s strategy, Buffett was clearly sensitive to the impact on displaced workers.

“If you look at any industry, they are trying to get more productive,” Buffett said. Still he noted that society’s improved living standard as a whole can be of little comfort to an individual that has lost their job, and he wishes there could be another way.

Buffett did term 3G’s severance packages at Kraft Heinz “more than fair.”

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Acquisitions Coca-Cola Commentary Warren Buffett

Commentary: Could Pepsi become a Berkshire Brand?

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It‘s no secret that Warren Buffett is partial to Coca-Cola, after all he not only drinks 5 Cokes a day, but Berkshire Hathaway owns 400 million shares of Coca-Cola stock valued at roughly $16.5 billion.

“I’m one quarter Coca-Cola,” Warren Buffett has joked.

However, with Berkshire and 3G Capital having been rebuffed in their $143 billion bid for Unilever Plc, one important analyst thinks PepsiCo, Inc. might be a logical target for the expansion of Kraft Heinz.

Pablo Zuanic, the Senior Analyst covering the Food, Beverage, and Household/Personal Care sectors for Susquehanna Financial Group, thinks Pepsi might quench Berkshire and 3G’s thirst for acquisitions.

Zuanic’s bona fides as an analyst have seen him recognized by Institutional Investor as the #1 Latin American Food & Beverage analyst for two consecutive years, the #4 US Food Analyst, and the #3 US Food Analyst in their Alpha Poll of Hedge Funds.

PepsiCo, Inc., which has a market capitalization of almost $161 billion, not only has one of the most popular soft drink brands in the world, but also owns snack-maker Frito-Lay and juice company Tropicana.

Zuanic recently raised his Pepsi price target from $118 to $132 on speculation that Kraft Heinz could team with Anheuser-Busch for the bid. The stock is currently just over $112 a share.

It seems logical that a bid for PepsiCo would see the beverages added to Anheuser-Busch, and the snack foods added to Kraft Heinz.

Zuanic notes that in his opinion Pepsi shares trade at a substantial discount when compared to Coca-Cola.

“PEP shares have lost visibility and now trade at a 25% discount to KO on apples-to-apples comps.” writes Zuanic.

While a Berkshire and 3G Capital bid for Pepsi might be a possibility, don’t expect to hear Buffett say “I’m one quarter Pepsi,” anytime soon.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Commentary Kraft Heinz

Commentary: Is Now the Time for Kraft Heinz to Make a Play For Mondelez?

(BRK.A), (BRK.B)

When Berkshire Hathaway and 3G Capital put together Kraft Heinz in 2015, the talk in the street was all about whether adding Mondelez International would be the next step. After all, Mondelez used to be part of Kraft before it was spun-off in 2012.

At the time, Warren Buffett downplayed the idea, noting that the newly formed Kraft Heinz had much to do in order integrate the two companies.

“At Kraft Heinz, we have our work cut out for us for a couple of years,” Buffett told CNBC. “Frankly, most of the food companies sell at prices that it would be very hard for us to make a deal even if we had done all the work needed at Kraft Heinz.”

Is Now the Time?

Here we are a year later and the fate of Mondelez in the rapidly consolidating food industry is still not clear. The company just dropped its proposed takeover of chocolate king Hershey, and the question of whether it’s an acquirer or acquiree is back in play.

As far as size goes, Mondelez has a market cap of roughly $67 billion, as compared to Kraft Heinz’s $109 billion, and combined they would put Kraft Heinz ahead of Unilever, which has a market cap of $143.4 billion, and move it closer to Nestle, which has a market cap of over $246 billion.

Berkshire and 3G Capital

Warren Buffett has clearly been pleased with his dealings with Jorge Paulo Lemann, Alex Behring and Bernardo Hees of 3G Capital. Partnering with 3G has brought a tough, tight-fisted management style that seeks to ring inefficiencies out of large-scale legacy companies, and Berkshire has benefited by gaining equity and putting large chunks of cash to work financing the deals.

Much of Berkshire’s financing takes the form of preferred stock, which has paid high interest rates in a low interest rate world. It’s a deal that Buffett loves, and one that he also used to help shore up companies such as Bank of America, Goldman Sachs and Dow Chemical during the Great Recession.

However, the high interest dominoes have been falling one after another as companies became healthy enough to get cheaper financing.

Similarly, when Berkshire and 3G went in on Kraft Heinz in 2013, Berkshire received $8 billion in preferred shares that paid it $720 million annually. Those shares were redeemed this summer as Kraft Heinz moved to lower its borrowing costs. It was a move that Buffett lamented in his annual letter to shareholders “…will be good news for Kraft Heinz and bad news for Berkshire.”

In addition, Berkshire’s $3 billion in preferred stock in Dow Chemical, which currently pays Berkshire $255 million a year, looks likely to end this year unless the market slumps, keeping the price of Dow Chemical shares below $53.72. .

Now that those deals have been coming to an end, a large chunk of preferred stock from a combined Kraft Heinz and Mondelez merger would be a fitting substitute.

Placing Their Bets

In August 2015, activist investor Bill Ackman took a $5.6 billion stake in Mondelez, a bet that clearly signaled he thought the snack maker would be acquired.

Among the other potential buyers could be Pepsi, which already owns Frito-Lay, and is facing declining sales in the traditional soda business, as consumers look for healthier options.

A Prize Worth Winning?

While a merger of Kraft Heinz and Mondelez has made sense to Wall Street, does it ultimately make sense in the world of consumer preferences in the 21st century?

When Mondelez was spun-off from Kraft, it was supposed to be the more exciting, high-flying of the two companies. However, its stock promptly slumped, and today it’s barely higher than it was five years ago. Many of Mondelez’s brands, which include Triscuit, Ritz, and Chips Ahoy!, reflect the consumer tastes from the 1930s-1960s, and its Oreo cookie goes back even further, first hitting store shelves in 1912. These brands are still popular, but will they be in another fifty years?

So, is Mondelez even a prize worth winning? That depends on whether there are similar savings that can be wrung out of Mondelez as there has been with Kraft and Heinz. If Berkshire and 3G think there are, there could be the next global food giant ready to take the stage.

One thing that is clear, in the 21st century world of food manufacturing and distribution companies, the assumption is that size matters in order to have global reach that can take advantage of growing markets in South America, India and China.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Acquisitions Berkshire Hathaway Automotive Berkshire Hathaway Energy Duracell Minority Stock Positions NetJets Precision Castparts Warren Buffett

Commentary: A Christmas Wish List for Under Warren Buffett’s Tree

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Here’s a Christmas wish list for presents under Warren Buffett’s tree. The items are big, so we’ll fit them under Charlie Munger’s tree as well.

1. Precision Castparts: There’s nothing like getting the present you bought for yourself. The pending acquisition the aerospace manufacturer looks like the gift that will keep on giving.  Demand for new airplanes will double over the next 15 years, as aging fleets are retired and millions more people start to fly regularly in India and China.

2. Duracell: Because everyone likes to get cash for Christmas! With the Duracell acquisition set to close in February 2016, Berkshire will gain not only the leading alkaline battery manufacturer, but will also get a company recapitalized by P&G with $1.7 billion in cash, and will get huge tax savings as it trades in its appreciated P&G stock for the battery maker.

3. More German Companies: Warren Buffett’s admiration for the German economy was on full display at the Berkshire Hathaway annual meeting in May 2015. This past February, Berkshire Hathaway struck a deal to acquire Devlet Louis Motorradvertriebs, a mail-order and retail chain selling motorbike clothing and accessories. The move, according to Buffett, was just the first small acquisition in a country with a strong economy and work ethic. And, with a rising dollar and a shaky euro, will more German companies fit under Berkshire’s tree?

4. Lots of Natural Gas: As the world dumps coal and moves to cheaper and cleaner forms of energy, Berkshire’s on the verge of striking it rich in Australia’s gas fields. Natural gas prices may be cratering now, but it never hurts to have a majority share of four trillion cubic feet of gas-in-place (yes, trillion) in Australia’s Whicher Range and Wonnerup gas fields. A new test well hopefully will bring good news in the new year.

5. More Auto Dealers: When Berkshire Hathaway jumped into the auto retailing business in March 2015, with its acquisition of the Van Tuyl Group, it added a whole new line of business to the mega-conglomerate. The Van Tuyl Group was the largest privately owned auto dealership group in the U.S., and Buffett promised that this was just the start of building a major auto-retailing empire. So, will Herb Chambers Companies, a privately-held, Boston-based dealership group with 55 total dealerships, be the perfect fit for Berkshire Hathaway Automotive? Its owner looks ready to sell. Time to wrap this one up and put a bow on it.

6. Happy Pilots at NetJets: Forget your crazy uncle, there’s nothing like having a happy family at Christmas. This holiday, NetJets’ pilots and its flight attendants will be celebrating their new contracts that bring substantial raises. Hopefully, they’ll use it to buy some of Berkshire’s fine products. How about some jewelry from Borsheims? It’s been a good year. Go for it!

7. More Solar & Wind! Berkshire’s quickly becoming the leading energy producer and distributor of solar and wind energy. This year saw major wind farm projects, including a new wind farm site in Adams County, Iowa, which will produce 162 megawatts of additional wind generation capacity in Iowa. Berkshire’s aggressive expansion of it solar power farms saw its Topaz Solar Farm in San Luis Obispo County, California, become one of the largest photovoltaic solar farms in the world. And, there’s plenty of room under the tree for more such projects, which not only bring cheap energy, but also lower environmental costs as they are emissions free. With the cost of solar energy dropping fast, Berkshire’s been signing amazing deals that are a Christmas present now and for decades to come. In Nevada, it has contracted to buy electricity from First Solar’s soon to be built Playa Solar 2 at the astoundingly low rate of only 3.87 cents a kilowatt-hour, and the deal is a fixed rate contract for twenty years.

8. More Deals with 3G Capital: Because everyone likes surprises. 3G’s aggressive acquisition strategy has been the perfect partner for Berkshire’s cash. 3G brings not only the aggressive cost-cutting (aggressive is an understatement) that is bringing legacy companies such as Kraft-Heinz into the 21st century, but also gives excellent financing and equity opportunities. 3G’s merger of Burger King with Tim Hortons brought Berkshire fat interest payments and made Berkshire a minority owner of the newly formed Restaurant Brands International. Surely, there are more deals to be done.

Hard to fit this all under the Christmas tree? Berkshire’s a big company. There’s room for all this and more.

Merry Christmas everybody!

–David Mazor

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Kraft Heinz Warren Buffett

Kraft Heinz Slashing Ad Agency Dollars as Part of Cost Cutting

(BRK.A), (BRK.B)

Newly formed Kraft Heinz is looking to change the way it produces its advertising, as part of its goal in wringing $1.5 billion in annual savings out of the combined company.

After merging on July 2, 2015, Kraft Heinz is now third-largest food and beverage company in North America and ranked number five world-wide. The company has eight $1 billion+ brands.

The merger left Heinz’s ad agency out in the cold. In late August, management shifted the Heinz accounts that had been handled by Interpublic’s UM to Kraft’s agency Starcom MediaVest Group’s Starcom. In addition, Kraft Heinz is now reviewing all of its creative accounts, according to Ad Age.

Ad Age reports that all the creative agencies have been asked to provide information and those chosen will be responsible for creative ideas, but will no longer provide the actual production of the ads, which will go directly to production houses.

Cost-Cutting Across the Board

Kraft Heinz’s chief executive Bernardo Hees is a partner in 3G Capital, which teamed with Berkshire Hathaway take over both companies and merge them together. He came to the helm of the combined company after a stint as the chief executive at A.J. Heinz where he slashed 7,000 jobs and brought a tight-fisted approach that made no expenditure too small to be examined.

At Heinz, Hees imposed cost controls big and small that include cuts to travel expenses, limits on the number of printer copies that can be made each month, the elimination of snacks in break rooms, and new mandates on cutting electricity usage. After assuming the helm of Kraft Heinz he immediately cut 2,500 jobs in his first week.

Among the management changes Hees has made was the appointment of Nina Barton to Senior VP of Marketing Innovation, Research and Development. Ms. Barton first joined Kraft in 2011 and was most recently the VP of Marketing for Coffee. She reports directly to George Zoghbi who was appointed Chief Operating Officer of U.S. commercial business.

Gone were Tom Bick, who was Heinz’s senior director-integrated marketing communications and advertising for the Oscar Mayer business, and Kara Henry, who was Heinz’s senior marketing director, communications and agency relations.

Warren and Charlie Agree

Warren Buffett and Charlie Munger’s have both supported Hees’s approach, believing that these legacy food companies, which both date back to the 1800s, need cost-cutting to be competitive in the 21 century.

“3G has been buying businesses that have too many people,” Buffett explained at the 2015 Berkshire Hathaway annual meeting. “You will have never found a statement from Charlie or me saying that a business should have more people than needed.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Acquisitions Charlie Munger Warren Buffett

Buffett and Munger Defend 3G Capital’s Aggressive Lay-Offs

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Questions about Brazil-based 3G Capital were much on the minds of Berkshire Hathaway shareholders at Berkshire’s annual meeting on May 2. Warren Buffett defended 3G’s cost-cutting methods as necessary to bring complacent century-old companies into the modern age.

“3G has been buying businesses that have too many people,” Buffett explained.

Over the past year, Berkshire and 3G went in together on two major deals.

On December 14, 2014, Berkshire provided key financing for the combining of Burger King International with the Tim Horton’s chain. The move was a merger that created a new company, Restaurant Brands International (QSR), one of the world’s largest quick service restaurant companies with more than $23 billion in system sales and over 19,000 restaurants in nearly 100 countries and U.S. territories.

3G Capital ended up owning 51% of the combined company and quickly installed 3G’s partner Daniel Schwartz as the Chief Executive Officer and a Director of the company.

Berkshire came out of the deal owning 68,530,939 Class A 9.00% Cumulative Compounding Perpetual Preferred Shares, and warrants to purchase 8,438,225 shares of Common Stock for a penny a piece. Berkshire later exercised those warrants for a modest 354,000% paper profit on its money.

On March 25, 2015, 3G and Berkshire announced the merger of their jointly-owned H.J. Heinz Company with Kraft Foods Group. The combined Kraft Heinz will be 51 percent owned by 3G Capital and Berkshire Hathaway. Kraft shareholders will own the remaining 49 percent. 3G partner Alex Behring will become the Chairman of Kraft Heinz. Berkshire will be the largest shareholder in Kraft Heinz.

In its growing partnership with 3G Capital, Berkshire Hathaway has found an aggressive partner that is looking to own major brands, and most importantly, to “right-size” them in the words of Charlie Munger.

Right-sizing refers to ruthless cost-cutting that cuts expenses in all areas, including laying off employees.

It’s the laying off of employees that drew questions at this year’s Berkshire annual meeting.

Counter to the Berkshire Ethos?

While some may mistakenly think Warren Buffett’s folksy persona might make him a softie when it comes to the management of companies, cost-cutting clearly is not just on the minds of 3G’s partners.

“You will have never found a statement from Charlie or me saying that a business should have more people than needed,” Buffett said at the meeting.

Charlie Munger compared the employment of excess personnel to the full employment guarantees in the former Soviet Union, where, as he quoted the old Russian saying, “We pretended to work, they pretended to pay us.”

Buffett went on to point out that Berkshire’s own strategy is to make sure its companies do not have excess employees, and as he joked about companies in general, “Any company that employs an economist has one employee too many!”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Acquisitions

Heinz-Kraft Merger Makes Berkshire Major Player at the Kitchen Table

(BRK.A), (BRK.B)

Berkshire Hathaway and 3G Capital have upped their bet on the tastes of American consumers. H.J. Heinz, which is wholly owned by 3G Capital and Berkshire Hathaway, will acquire Kraft Foods Group in a mega-merger that creates a $37 billion food company that will be the number five food and beverage purveyor in the world, and North America’s number three food company.

The combined company will be known as The Kraft Heinz Company.

Kraft Heinz will be 51 percent owned by 3G Capital and Berkshire Hathaway. Kraft shareholders will own the remaining 49 percent. The deal is expected to close in the second half of 2015.

The combined company will have a portfolio of packaged food brands that includes Heinz ketchup, Philadelphia cream cheese, and Oscar Mayer meats.

Kraft has $18 billion in annual sales, employs 22,500 workers, and boasts that 98 percent of U.S. and Canadian households have Kraft products in their kitchens. Nine of Kraft’s brands have more than $500 million in annual sales, and 80 percent of sales are in categories where they hold the #1 or #2 market position.

Kraft Heinz will have $28 billion in sales with eight $1+ billion brands and five brands between $500 million-$1 billion.

Under the terms of the merger, Kraft shareholders will receive one share of the combined company and a special cash dividend of $16.50 per share. The special cash dividend will be funded by 3G Capital and Berkshire Hathaway. While Berkshire is putting in cash, it is not swapping any Berkshire stock, which is Warren Buffett’s preferred method of acquisition.

3G Capital and Berkshire acquired Heinz in 2013 for $23.2 billion. The day to day management of the company has been handled by 3G Capital, with 3G’s managing partner, Alex Behring, serving as Heinz chairman. Behring will assume the reins of the new company as chairman, and current Kraft chief executive John Cahill will be appointed vice chairman.

Kraft has struggled in recent years as its packaged foods such as Velveeta, Miracle Whip, Planters, Jell-O and Kool-Aid have lost ground in the era of natural foods, however Heinz’s strength internationally is seen as a plus for the combined company. Kraft’s current markets are the U.S., Canada and Puerto Rico.

On the investor side, Kraft was a reliable dividend stock for investors as it’s brands brought steady earnings, even amidst lackluster growth. Its goal has been to “deliver steady, reliable growth with a strong focus on cash flow to fund a highly competitive dividend…” At the time of the merger announcement its annual dividend yielded 3.59 percent.

For Berkshire and 3G the deal is already a winner. Barron’s states “By our calculation, 3G and Berkshire have tripled their original $8.5 billion ($4.25 billion for each) equity investment in Heinz in less than two years, which amounts to a private-equity type score on a deal that originally looked like it was fully priced. Heinz was taken private at about 20 times forward earnings. We estimate that Berkshire and 3G are each sitting on more than $10 billion in profits from their investments in Heinz.”

The deal will also raise Heinz’s debt rating. In a press release, Kraft Heinz states that it is “fully committed to maintaining an investment grade rating; Company plans to maintain Kraft’s current dividend per share, which is expected to increase over time.”

Alex Behring’s management of Heinz has brought significant cost cutting, and a similar approach is expected at Kraft Heinz. The company expects to cut $1.5 billion in annual expenses by the end of 2017.

“This is my kind of transaction, uniting two world-class organizations and delivering shareholder value,” Warren Buffett said. “I’m excited by the opportunities for what this new combined organization will achieve.”

3G’s and Berkshire’s focus is on a long term investment. Kraft’s announcement of the merger states “Berkshire Hathaway and 3G Capital have a history of successful partnerships and are committed to long-term ownership of The Kraft Heinz Company as it strengthens its leadership position in the industry.”

The company notes that “As the cash consideration is fully funded by common equity from Berkshire Hathaway and 3G Capital, the merger is not expected to increase the debt levels of The Kraft Heinz Company. The Company is fully committed to deleveraging in a timely manner and to maintaining an investment grade rating going forward.”

Buffett, who drinks five cans of Coke a day, will now have lots of packaged foods to munch on all day long. He recently joked that the secret to his longevity was that “I eat like a six-year-old.”

Could his self-confessed love for munching on UTZ brand potato sticks make Utz Quality Foods, the largest independent privately held snack food brand in the U.S., a fit someday for Kraft Heinz?

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.