In 2013, Berkshire Hathaway teamed up with 3G Capital to purchase H.J. Heinz. 3G Capital took control of operations, while Berkshire was the financing partner. In that role, Berkshire purchased $8 billion of Heinz preferred stock, which carried a 9% coupon ($720 million). They also spent $4.25 billion to acquire 50% of the common equity.
In 2015, Heinz merged with Kraft. As part of the merger, Berkshire put up an additional $5.55 billion. All in all, Berkshire spent $9.8 billion for 325,634,818 shares of the newly-formed “Kraft Heinz Company”; cost basis per share is effectively $30.10. To date, I estimate that Berkshire has received ~$4.76 billion in dividends from Kraft Heinz, and the current position is worth about $12.4 billion. This ignores any dividends that Berkshire received for the brief period that Heinz was privately held.
What about the preferred shares? They were redeemed in June 2016 for $8.32 billion. So, over a three-year period, Berkshire collected $2.16 billion in preferred dividends and had its shares redeemed at 104 of par. Buffett was surely disappointed that the preferred were redeemed so quickly, but nevertheless, this part of the investment worked out well.
Below I’ve summarized the entire investment to date. The investment has delivered an IRR of 9% and a MOIC of 1.55 - on a cash outlay of $17.8 billion, Berkshire has gained ~$9.8 billion so far.
This is a pretty good return for an investment that everybody lists as one of Buffett’s recent mistakes. The issue is that people look to the performance of Kraft Heinz since its creation, seeing it is down 50%. While it is true that the merger with Kraft was questionable (Buffett has since said that they overpaid for Kraft), the acquisition of Heinz was done at such an attractive price that overall Berkshire has still done pretty well.
Moving forward: KHC currently trades at a market cap of ~$47B and an enterprise value of ~$65B. I rarely look at EBITDA, but KHC’s financials have so many moving pieces (one-time gains/losses and impairments) that it makes sense to start with that figure and make adjustments to arrive at unlevered and levered FCF.
Using the 5-year average figures, KHC trades at an EV-to-unlevered FCF of ~14 and a market cap-to-levered FCF of ~13. My guess is that KHC will continue to use a large chunk of FCF to pay down debt to a satisfactory level, at which point the payout ratio will increase to around 100%. Assuming no growth and no multiple expansion or contraction, KHC will probably deliver a 6-8% annual return to shareholders from here. This is not exactly a home run by Berkshire, but not a bad result either.
A beautifully simple piece.
Have to laugh at the criticism Warren and Charlie receive for a 'mistake' like this. But then again, they've received plenty of flack upfront for many of their best moves, like AAPL and BNSF.