Kraft Heinz, one of the key holdings in Berkshire Hathaway’s investment portfolio, recently posted a record US$15.4 billion writedown, causing its share price to plunge as much as 27.5 percent on Friday.
Buffett helped finance Heinz Company’s merger with Kraft Foods Group in 2015, but the bet went sour. Berkshire acquired a 50 percent stake in ketchup giant Heinz for US$12 billion in 2013, and teamed up with Brazilian private-equity firm 3G Capital to push its merger with cheese maker Kraft in 2015.
Berkshire paid a total of US$17 billion for a 26.7 percent stake in Kraft Heinz, making it as the combined firm’s biggest shareholder, while 3G Capital held a 24.2 percent stake.
Like its investments in Coca-Cola, Wells Fargo, American Express, Apple, and many other companies, Berkshire was largely a passive investor in the Kraft Heinz deal, while its partner 3G Capital became more actively involved in restructuring the company.
Buffett had also participated in 3G Capital’s previous investments in Burger King and Tim Hortons, and both worked out well. Unfortunately, the Kraft Heinz deal didn’t.
3G Capital is good at acquiring old consumption firms and restructuring the business through cost-cutting cost and reforms in order to help them boost their earnings.
The private-equity giant intended to do the same with Kraft Heinz. But the restructuring process turned out to be much more complicated, considering that both century-old firms have their own traditions and legacies. There is also little room to hike product prices.
Kraft Heinz disclosed a US$15 billion writedown on some of its brands, resulting in a loss of US$10.3 billion. Its shares sank on Friday, wiping US$16.1 billion off the company’s market capitalization. The market value of Berkshire’s stake in the company shrank by US$4.3 billion.
With the Kraft Heinz debacle, and Buffett’s failure to jump on the tech bandwagon, thereby missing great investments such as Google, Amazon and Facebook in recent years, it’s not surprising that some are beginning to doubt if the 89-year old investment juggernaut is still at the top of his game.
There are more challenges waiting for Buffett as the company is sitting on US$112 billion of cash. In his letter to shareholders, Buffett said: “Prices are sky-high for businesses possessing decent long-term prospects.”
This article appeared in the Hong Kong Economic Journal on Feb 25
Translation by Julie Zhu
[Chinese version 中文版]
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