Warren Buffett’s latest deal, the agreement with 3G Capital to buy H.J. Heinz Co., highlights three of the billionaire’s favorite strategies: betting on snack foods, investing in companies he trusts others to manage, and locking in above-market fixed returns.
Jorge Paulo Lemann’s 3G will run the maker of condiments and Ore-Ida potato snacks after the $23 billion deal, even as Buffett’s Berkshire Hathaway Inc. commits more than $12 billion for equity and a preferred stake.
Buffett helped finance Mars Inc.’s purchase of Wm. Wrigley Jr. Co. in 2008 for about $23 billion and controls the largest stockholding of Coca-Cola Co. Berkshire also owns See’s Candies and ice-cream company Dairy Queen.
Heinz “just comes to mind as almost synonymous with ketchup, just as Coca-Cola is almost synonymous with soda,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business.
Buffett has said that while he struggles to assess the long-term prospects of technology companies, he has more confidence in established brands of treats that can benefit from expanding sales outside the U.S.
“More people will be drinking Coca-Cola 10 years from now, or chewing Wrigley’s gum,” Buffett told Bloomberg Television’s Betty Liu in an interview last year. “I know that.”
Berkshire and 3G will each have more than $4 billion in equity in Heinz, and Buffett’s firm will also take a preferred stake of $8 billion, which gets an annual dividend of 9 percent, according to three people familiar with the deal. The people asked not to be identified because the terms are private. Buffett will leave Heinz oversight to 3G, he told CNBC today.
The billionaire wrote in 1999 that he and Vice Chairman Charles Munger delegate responsibility to the heads of operating units “almost to the point of abdication.”
Buffett wrote in 2010, after striking a deal with Leucadia National Corp. to establish Berkadia Commercial Mortgage LLC, that he favors deals where partners run joint investments. He praised Leucadia executives Joe Steinberg and Ian Cumming for a “terrific experience” in an earlier venture when they bought Finova Group Inc., a Scottsdale, Arizona-based lender.
“Joe and Ian did far more than their share of the work, an arrangement I always encourage,” Buffett said in a letter to shareholders. “Naturally, I was delighted when they called me to partner again.”
Buffett and Lemann served together as directors of razor-maker Gillette Co. Buffett resigned from that board in 2003. Lemann has also invested in consumer products, with bets on brewer Anheuser-Busch InBev NV and Burger King Worldwide Inc.
“Possessing a powerful worldwide brand is essential for sustained success” in some lines of business, Buffett wrote in his annual letter to shareholders in 2008, explaining his preference for companies with a “moat” protecting them from competitors. “Long-term competitive advantage in a stable industry is what we seek.”
The Heinz transaction also shows how Buffett likes to lock in fixed returns from preferred stakes on the same deals in which he gets the chance for greater growth through equity bets. Buffett got preferred shares and warrants to buy stock after he injected funds in Goldman Sachs Group Inc. in 2008 and Bank of America Corp. in 2011.
Berkshire got $4.4 billion of 10-year bonds paying 11.45 percent as part of the 2008 Wrigley deal in which the company also acquired $2.1 billion of 5 percent preferred stock.
The Heinz preferred shares provide a “phenomenal rate, and I think it’s relatively trustworthy,” Meyer Shields, an analyst at Stifel Nicolaus & Co. said in an interview. “Any other company that could put out $12.4 billion would gain access to similar returns, but there aren’t that many of them.”