In a stellar move, you can now add Maxwell House and Velveeta to the Berkshire Hathaway portfolio.
Berkshire Hathaway and Warren Buffett owned Heinz, along with the private equity firm out of Brazil, 3G capital, is buying Kraft in the near future.
Most famously, when Buffett and Berkshire Hathaway purchased Burlington Northern Santa Fe railroad, they called it an all in bet on the US economy. The deal with Kraft is an extension upon this bet on America. It’s also a sign that Buffett is very fond of betting on American taste buds.
Berkshire Hathaway already owns See’s Candies and Dairy Queen. The company has invested in the privately owned Mars Corporation, owner of M&Ms, Wrigley and Snickers. And as anyone following Berkshire Hathaway already knows, they are the biggest Coca-Cola shareholder in the world.
In a recent interview, Warren Buffett said to Fortune magazine that he eats like a six-year-old. From that standpoint, the Kraft deal makes incredibly perfect sense. All six-year-olds love mac & cheese!
Warren Buffett doesn’t care about the sexy, glamorous luxury brands. He purchases businesses that he understands, and particularly businesses that have a strong following with the middle class – even if the companies have sluggish growth rates and are boring on the surface.
This year, the analysts believe that Kraft’s profits will increase by 4% per year in the next five years. Buffett doesn’t seem all that concerned about this.
“I am delighted to play a part in bringing these two winning companies and their iconic brands together. This is my kind of transaction, uniting two world-class organizations and delivering shareholder value,” said Buffett on Wednesday morning in a press release regarding the deal.
Buffett seems to have discovered a kindred spirit in the cofounder and CEO of 3G, Jorge Paulo Lemann.
Besides having a major interest in Heinz, 3G also has a controlling stake in InBev, the owner of Anheuser-Busch.
Last year, Berkshire Hathaway even helped provide financing to 3G when purchasing Tim Hortons as part of a Burger King acquisition. This was a controversial deal as some people felt that Burger King was attempting to lower their tax bill in the US by buying Tim Hortons, the Canadian-based company.
Overall, Berkshire Hathaway ended up committing $3 billion to the deal and currently owns a stake in the combined firm named Restaurant Brands International as a result of this investment.
So what is on the horizon for Warren Buffett? On Wednesday morning he mentioned in a CNBC interview that Berkshire Hathaway intends to own Kraft Heinz, which is going to be a company that is publicly traded, “forever.” Berkshire Hathaway’s going to be the largest shareholder of the merged companies.
Obviously forever is a very long time. Nobody knows for sure if Berkshire is going to hold the stock for an eternity. But it’s very clear that Buffett and Berkshire Hathaway plan to continue investing in the food business for a long time.
You also have to wonder if Berkshire Hathaway plans to buy any more businesses in the near future, with or without 3G Capital.
“Berkshire is now a sprawling conglomerate, constantly trying to sprawl further,” wrote Buffett in his annual shareholder letter released earlier in the month. He also mentioned that Berkshire plans to partner with 3G Capital again.
Some have even speculated that 3G Capital could seriously be interested in making a purchase in Pepsi.
It would be very difficult to imagine that Warren Buffett would back this deal since he has such a heavy investment in Coke for all these years. But given the Coca-Cola struggles faced on Wall Street over the past few years, some have even fantasized that 3G and Berkshire Hathaway could eventually take over Coke. Either of these deals is not likely to happen anytime in the near future considering the size of Pepsi and Coke. Pepsi’s market value is worth roughly $142 billion at this time, and Coke is even more at $177 billion.
But there’s no question that Berkshire Hathaway could certainly purchase smaller food companies. Again, in the shareholder letter this year, Warren Buffett listed his and Charlie Munger’s criteria when analyzing if a company is going to be a good fit for an acquisition.
Ultimately, they look for blue chip companies that have a strong history of delivering strong earnings and little debt, and they also look for companies with strong returns on equity. Buffett also added that Berkshire Hathaway was targeting companies in the $5 billion range to $20 billion range. He also said that the bigger the company is, the better it is.
According to the criteria mentioned above, some potential targets are J.M. Smucker, Campbell Soup and McCormick. They fit very nicely according to the characteristics laid out by Berkshire Hathaway.
So it shouldn’t come as a big shock to anyone if one of these companies eventually ends up under the Berkshire Hathaway umbrella. But don’t expect it anytime soon until the Kraft deal is finished.