Buffett’s Plan for More Deals With 3G Sparks Kellogg Talk

What comes after ketchup and doughnuts?

Warren Buffett’s Berkshire Hathaway Inc. teamed up with 3G Capital two years ago to acquire ketchup maker H.J. Heinz Co. and then helped finance 3G-owned Burger King Worldwide Inc.’s purchase of Canadian coffee-and-doughnut chain Tim Hortons Inc. Ever since those deals, speculation has simmered about what they’ll do next -- be it Kellogg Co., Kraft Foods Group Inc. or Mondelez International Inc.

Buffett stoked the conversation with his annual letter to Berkshire shareholders Saturday, saying he expects to “partner with 3G in more activities.” That may put the billionaire on track for another deal targeting one of America’s consumer giants, such as $23 billion cereal maker Kellogg, said Edward Jones & Co.’s Brian Yarbrough.

“Everyone knows that these guys are probably lining up,” Yarbrough, a St. Louis-based analyst, said in a phone interview. “You’ve got to think in the next 12 to 18 months, there’s probably some kind of deal.”

Buffett looks for targets that have strong brands, simple businesses and consistent earnings power. 3G, co-founded by Brazilian billionaire Jorge Paulo Lemann, is known for its ability to improve operations and cut costs.

Deal ‘Template’

Campbell Soup Co.’s vegetable procurement and processing business would fit well with Heinz, and Kraft, the $38 billion packaged-food company, offers strong cash flow, according to analysts and investors. Mondelez, a $61 billion snack maker, may also be appealing because of its strong international presence and below-average margins that 3G could help improve, Yarbrough said.

“There’s a certain template there,” Bill Smead, chief executive officer of Berkshire shareholder Smead Capital Management, said in a phone interview. “They need something of merit that’s out of favor for one reason or another.”

Buffett’s recent major deals include an agreement in October to take over Van Tuyl Group, the largest privately owned U.S. auto dealer. The next month, Berkshire announced a plan to buy Procter & Gamble Co.’s Duracell battery business.

His biggest acquisition of the last few years was the buyout of Heinz with 3G for more than $23 billion. There will probably be more like that, or ones similar to last year’s Burger King transaction, Buffett said in his annual letter to shareholders.

“Whatever the structure, we feel good when working with Jorge Paulo,” he said.

Big Targets

Berkshire had $63 billion in cash at the end of December. Whatever the company and 3G tackle next will be big, said Smead, whose firm manages about $1.3 billion. With private-equity dry powder at a high, the opportunities among small to medium-sized U.S. companies have been picked over, he said.

“It puts you into that $20 billion to $40 billion or greater type category,” Smead said. Food and beverage deals are the most likely since that’s 3G’s area of expertise. The investment firm also backs Anheuser-Busch InBev NV.

Yarbrough of Edward Jones puts Mondelez, Kellogg, General Mills Inc. and potentially McCormick & Co., the $10 billion salt-and-pepper maker, on his list of the most logical targets.

Mondelez split with Kraft in 2012 and offers Buffett and 3G a stronger international foothold than the Velveeta-cheese purveyor. Buffett used to be a large holder of the predecessor company and criticized its 2010 takeover of Cadbury Plc as “dumb.”

Some Complications

General Mills, the $32 billion seller of Cheerios and Lucky Charms, has a joint venture with Nestle SA that may complicate a Buffett buyout. McCormick could lose a major contract with Taco Bell operator Yum! Brands Inc. if it’s controlled by the owners of Burger King, Yarbrough said. So those may be less likely.

Yum! Brands itself has been cited as a potential target for Buffett and for 3G. It has a market value of $35 billion.

One out-of-the-box and smaller idea is Mattel Inc., the $9 billion maker of Barbie dolls and Fisher-Price toys. The company makes sense as a potential target because it’s a great brand that has “had an awful lot go wrong,” said Smead of Smead Capital. Mattel replaced its CEO in January after a sales slump extended to five quarters.

Buffett also highlighted Mars Inc. and Leucadia National Corp. as possible partners for deals in his letter. Berkshire may provide financing or act as an equity partner in friendly transactions, he said. That may spell an interest in chocolate or financial takeovers.

Tootsie Roll Industries Inc., the $2 billion maker of Junior Mints, became the subject of takeover speculation after the death of long-time CEO Melvin Gordon. It may entice Buffett.

Still Pricey

While most of these targets are logical, Buffett likely won’t pull the trigger on his “elephant gun” until he feels they’re fairly priced, said Richard Cook, co-founder of Cook & Bynum Capital Management, which invests in Berkshire. Consumer staples companies on the Standard & Poor’s 500 have outperformed the broader index over the last 12 months.

“Things are expensive right now and Berkshire’s cash levels are rising because they’re having a hard time finding things to do,” Cook said in a phone interview. But “clearly he wants to do other deals with 3G” and “there is a huge range of things that would fit within that.”

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