Warren Buffett’s Special Access

Warren Buffett is the master.  There was never any real doubt about that in my mind, but the Heinz/Kraft deal that was announced yesterday is another reminder that the Oracle of Omaha hasn’t lost his touch.

Over the past few years, Buffett has been on a buying spree, probably to help set the course for Berkshire Hathaway in the coming decades knowing that he might not be around to steer the ship.

In 2013, Buffett teamed up with a Brazilian private equity group, 3G Capital, to buy Heinz, the food manufacturer best known for its famous ketchup.

Buffett and 3G paid about $28 billion for Heinz – each company contributed $4 billion in cash, the company issued $8 billion in preferred stock yielding nine percent that Buffett agreed to buy, and an additional $12 billion in debt was taken to pay for the company.

So, Buffett and 3G only invested $8 billion and used borrowed money to pay for the rest, also known as leverage, which is interesting because Buffett famously said, ‘if you’re smart, you don’t need [leverage], and if you’re dumb, you’ve got no business using it.’

I guess he’s smart, and just didn’t need it, but it surely worked out for him this time: earnings have gone up more than a third since they took the company private and their stake has doubled thanks to the leverage.

At the same time, he has been clipping a nine percent coupon on the $8 billion in preferred stock – a terrific yield in a low yield environment, which has worked out to $1.1 billion in dividends through the end of 2014 and will be $2.2 billion in mid-2016, the soonest that Heinz can call in the preferred stock.

Berkshire will contribute another $5.2 billion to fund the takeover of Kraft and he and 3G will own 51 percent of the new company, to be called Kraft Heinz (a very inventive name).  Interestingly, the new Kraft Heinz stock will be publicly traded, so this deal allowed Buffett and 3G to take his Heinz stake public without an Initial Public Offering (IPO).

There are a lot of strategies that are available to investors like us that were not accessible in years past, but getting in on deals like this one are not included.  Being Warren Buffett has some real advantages when it comes to deal making, and he’s rightly not shy about making use of them.