Maybe Warren Buffett and 3G Capital should have tensions over Kraft Heinz

When Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) and private equity firm 3G Capital have teamed up to orchestrate the acquisition of Kraft through Heinz (NASDAQ: KHC), it was a big deal that apparently was a big dud. Buffett now admits he overpaid Kraft significantly, and the joint company’s market cap is now less than half of what it was a year ago. Thus, the rumors that there has been friction between the partners are understandable to say the least.

In this segment of MarketFoolerie, host Chris Hill and lead analyst Jason Moser discuss these rumors, Buffett’s denial, issues at Kraft Heinz, and more.

To watch full episodes of all of The Motley Fool’s free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 25, 2019.

Chris Hill: Speaking of slower growth, let’s talk about Kraft Heinz. Shares are down about 50% this year. Problems have been reported between Berkshire Hathaway and the 3G capital. You have to remember that these two teamed up a few years ago to buy Kraft Heinz and made a lot of headlines back then, and rightly so, in part because Warren Buffett had, until then, makes acquisitions mostly on its own. So at the time, it was like, “Wow, here’s that new contract.” Additionally, Buffett has been a private equity critic in the past. It raised some eyebrows that Berkshire Hathaway would team up with a private equity firm, even with 3G Capital’s reputation, and then buy Kraft Heinz.

Apparently these reports … you hear little rumblings here and there. It never struck me like something that made the headlines. Maybe I missed it. I do not know that The Wall Street Journal had a splashing headline on the front page about a big loophole. But apparently Warren Buffett felt the need to contact CNBC and come out today and say there is no tension between Berkshire Hathaway and 3G. He really downplayed these reports.

I don’t know your reaction, but my reaction was, first of all, considering what happened, considering how Kraft Heinz has behaved, especially over the past couple of years, of the write-downs that happened to Berkshire Hathaway, of the fact that Buffett had to come out and say, “Oh, yeah, we paid too much for that”, I think any reasonable person would expect there to be a certain level Of voltage. It seems a little too much to protest.

Jason Moser: Your Soft message made me laugh while going to work. ” Really ? Shouldn’t there be some tension? Yeah, you’re right, there should be some tension! The stock has been killed, and for many reasons not necessarily easy to resolve. Notwithstanding inaccurate statements, restatements notwithstanding –

Hill: Just to add in parentheses, yes, Kraft Heinz, also some accounting issues.

Moser: We have certainly seen other companies have it. You are talking about something that is very fixable. You can get over it. The thing about this thing that always struck me, on the surface, is just in his wheelhouse. Consumer brands, not related to technology. It’s food. It’s something you associate with our childhood. Many of these brands you and I associate with our childhoods. I think this is part of the problem. I know he said the biggest problem Kraft Heinz faces is that Heinz overpaid when it merged with Kraft in July and then they made a mistake by overpaying for that investment. I think it goes much further than that. I think these are brands that do not resonate with the younger generations of consumers today. I don’t think it necessarily changes that quickly, especially when you see the attitudes towards what people eat, the brands that come with it, the nature of being able to go out and the brand building that wasn’t there when we were growing up, through social media and other channels.

This does not mean that this is a trip to zero. I don’t think it is. There is value in Kraft cream cheese and Heinz and Philly and so on. But I don’t see them as brands that are going to lead the way in the future. For them, simply thinking that paying too much was the problem completely misses the point.

Hill: I am not against Berkshire Hathaway. I’m not against Warren Buffett. But to be completely honest, part of me is encouraged that, yes, Warren Buffett’s human. He would probably like a mulligan on this one. Every now and then we talk about sunk costs and how hard it is to tackle that as an investor. It turns out that it is difficult for Warren Buffett to fight. At the time of this deal in 2013, one of the things Buffett said at the time was, “Oh, yeah, I’ve had an eye on Heinz since 1980.” For over 30 years he had, on one level, looked at the Heinz business and said, “Boy, I wish I had a part of it.”

Moser: And ironically, if he had made that investment at the time, I’m sure things would have turned out a lot better. You found something there that I would like to know. Considering a mulligan, if you could get this deal for half of what you paid for, would you do it again? I would ask this question of Buffett. Would you do it again if you could do it halfway? Maybe he would, maybe he wouldn’t. I think the value investor in him most likely would. I would question that again. Again, this goes back to, sometimes things are cheap for a reason.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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