How did Buffett stumble on Kraft Heinz?

March 04, 2019 09:58
Warren Buffett has acknowledged that he didn't get things right in relation to the Kraft Heinz deal. Photo: Bloomberg

Billionaire investor Warren Buffett admitted last week that he overpaid in the 2015 merger that created Kraft Heinz. "I was wrong in a couple of ways on Kraft Heinz," Buffett said on CNBC television. "We overpaid for Kraft.”

Buffet said he had underestimated the competition from retailers like Costco.

His comments came days after Kraft Heinz's share price slumped following a massive US$15.4 billion writedown.

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.

The Kraft Heinz deal is a bit special in the sense that it deviates from the types of deals Buffett prefers most and is particularly good at.

Buffett is very good at going against the crowd, playing a white knight during industry or economic downturns and snapping up assets at beaten-down prices.

A classic example would be his US$5 billion investment in Goldman Sachs during the height of 2008 financial crisis.

Buffett also has a sharp sense for spotting great companies with strong moats and led by great leaders, and investing in them for long term. Coca-Cola is one such example.

The way I see it, having too much cash and limited investment opportunities is probably one factor behind Buffett’s bet on Kraft Heinz, which may not have met his most stringent investment criteria.

It seems Berkshire is struggling to find good investments as asset prices kept spiking in recent years.

Buffett admitted that he has overestimated the moats of Kraft Heinz.

Retailers like Walmart and Costco have introduced their own store brands of cheese, ketchup, canned soups, etc. Stronger brands can "go toe to toe with Walmart or Costco" but weaker brands "tend to lose out," Buffett said. "The ability to price has changed, and that's huge."

Nevertheless, Buffett said he has "absolutely no intention" of reducing Berkshire's stake in Kraft Heinz, noting that the company has "very, very strong" brands and that he would be happy to own it a decade from now.

This article appeared in the Hong Kong Economic Journal on March 1

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist