Buffett awaits $8bn of ‘bad news’

Warren Buffett, the chief executive of Berkshire Hathaway. File picture: Nati Harnik

Warren Buffett, the chief executive of Berkshire Hathaway. File picture: Nati Harnik

Published May 31, 2016

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Seattle - Warren Buffett is about to get back the $8 billion - plus a little extra - that his Berkshire Hathaway invested in Kraft Heinz.

“That will be good news for Kraft Heinz, and bad news for Berkshire,” he wrote in his most recent annual letter to shareholders.

Read: Buffett's Berkshire bets $1bn on Apple

It’s easy to see why. The packaged food giant is paying Buffett’s company 9 percent, or $720 million annually, on the stake - an attractive return at a time when the billionaire has struggled to find large investments, and the cash on Berkshire’s balance sheet earns almost nothing.

Kraft Heinz has already moved to lower its financing costs. Last week, the company sold $7 billion bonds in euros and dollars with interest rates that ranged from 1.5 percent to 4.375 percent for the longest-term debt.

Chief Executive Officer Bernardo Hees has been shutting factories and slashing jobs to cut $1.5 billion in annual costs by 2017, following a playbook he used at HJ Heinz to produce some of the industry’s best margins. Kraft Heinz has made a bigger push into mustard and barbeque sauce, aiming to round out its slate of condiments, while removing artificial colours and flavours from Kraft Macaroni & Cheese.

Buffett’s value

Kraft Heinz has gained 16 percent this year through the close of trading on Friday, outperforming the S&P 500 packaged food index, which is up 6.8 percent. The lower financing costs will help free up cash for marketing and product innovation, said Asit Sharma, an analyst at the Motley Fool.

“Buffett’s value came in his endorsement of the deal, and that vote of confidence has already been realised in the stock price,” he said. “Now it makes sense to optimise cash flows.”

Buffett got the $8 billion of preferred shares in 2013 as part of a deal with buyout firm 3G Capital to take Heinz private. Two years later, the ketchup maker combined with Kraft Foods Group, forming one of the largest packaged-food companies in the world. Berkshire and 3G are the controlling shareholders.

The 2013 deal allowed the foodmaker to pay a premium to redeem the preferred shares after three years, a period that expires next week. Buffett has said Berkshire will get about $8.3 billion, replenishing its coffers after the purchase of manufacturer Precision Castparts in January, one of his biggest buyouts ever.

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