Berkshire Hathaway Wins Big in Kraft Heinz Company

By August Pimentel,
Money and Investing Writer

Warren Buffett has covered American mac and cheese with ketchup. More literally, he oversaw the merger between Kraft Food Inc. and H.J Heinz Company in June, and as a result, is seeing some large profits in his investment firm, Berkshire Hathaway.

According to Bloomberg Business, Berkshire Hathaway (NYSE: BRK.A) has been collaborating with Brazilian investment firm 3G Capital since March of this year to merge two of the largest food companies in the world: Kraft Food Group and Heinz, the former being collectively owned by the two firms since 2013.

This convergence created the Kraft Heinz Company (NASDAQ: KHC), which now stands as the fourth-largest corporation in the United States, based on the Fortune 500 revenue statistics.

Upon the acquisition of Kraft, Buffett and 3G went to work streamlining the new company, cutting costs by removing free snacks from Kraft’s headquarters in Chicago, limiting appliance and printer usage, reducing travel spending, as well as laying off the former Chief Financial Officer of Kraft, James Kehoe.

An additional 2,500 Kraft Heinz workers were laid off over the past six months, according to CNN.

Chief Executive Officer at Kraft Heinz, Bernardo Hees, is planning to save the company budget $1.5B within two years.

This streamlining greatly increased margins for the company, which had been improving at Heinz since the 2013 takeover, but had been in decline at Kraft due to underproduction in its factories.

With this new advantage, Kraft is expected to grow sales 1.5 percent annually and Heinz 1.3 percent, according to Kraft Heinz’s file with the Securities and Exchange Commission.

The merger in itself was of significant importance to Berkshire Hathaway, when the company made $4.4B in its 26 percent stake in the company.
This gain more than doubled Berkshire Hathaway’s net revenue from last year, up to $9.43B, increasing the book value (a representation of assets minus liabilities) of the company near 1 percent and increasing share price from $2,811 to $5,737 in that time frame.

Apart from this new venture, Buffett’s company had not seen nearly as much success.

Berkshire’s operating profit, which does not include the gains from investment in Kraft Heinz, fell 3.7 percent, largely due to a 34 percent decline in underwriting profits for Berkshire’s largest insurance company, GEICO.

This loss, according to GEICO, was partly due to an increased number of claims in all coverage areas, and also an increase in the average severity of claims.

The loss can also be connected to the steady decline of the International Business Machines Corporation over the past year, which reported a 14 percent decline in revenue during the third quarter, which lost approximately $2B for Berkshire Hathaway according to the Wall Street Journal.

Despite this, Berkshire’s non-insurance companies saw a 5.2 percent increase in operating profit to $3.4B.

Looking forward with Kraft Heinz, Berkshire is hoping to leverage its resources to claim close to a billion dollars in expired license agreements form Kraft’s foreign parent company, Mondelez, over the next year.

As Kraft Heinz de-levers, Berkshire could redeem couponed shares in 2016 for an annual $720M reduction of debt, according to Credit Suisse.

Assuming this circumstance continues, by 2017 Kraft Heinz will increase net leverage three-fold, and would then have the funds to acquire another competing food company, making this new company even more of a presence in the industry, and pushing the portfolio of Berkshire Hathaway in a positive direction.

A version of this article appeared in the Tuesday, November 17th print edition.

Contact August at
august.pimentel@student.shu.edu

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