Berkshire’s Kraft Heinz Partnership With 3G Capital Couldn’t Be Going Better


Investors who closely follow the Berkshire Hathaway (NYSE:BRK.A) portfolio will know that there is a relatively new name that represents the largest portion of the portfolio.

The company is Kraft Heinz and Berkshire is one happy shareholder.

In 2015 Kraft Foods Group merged with H.J. Heinz in a deal that was put together by 3G Capital and Berkshire. Kraft shareholders (which included Berkshire) received 49 percent of the stock in the combined entity, plus a cash dividend of $16.50. Berkshire and 3G also invested $10 billion in the deal.

Kraft Heinz Co (NASDAQ:KHC) was created with Berkshire ending up with 325 million shares and almost 27% of the company.

Berkshire and 3G (a private-equity firm founded by Brazilian billionaire Jorge Paulo Lemann) had previously joined forces to buy Heinz in 2013.

In his 2015 letter to shareholders which was released in early 2016 Berkshire shareholder Warren Buffett had plenty to say about his expanded partnership with 3G:

“Our Heinz partnership with Jorge Paulo Lemann, Alex Behring and Bernardo Hees more than doubled its size last year by merging with Kraft. Before this transaction, we owned about 53% of Heinz at a cost of $4.25 billion. Now we own 325.4 million shares of Kraft Heinz (about 27%) that cost us $9.8 billion. The new company has annual sales of $27 billion and can supply you Heinz ketchup or mustard to go with your Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite meal. (We will have the Oscar Mayer Wienermobile at the annual meeting – bring your kids.)

Jorge Paulo and his associates could not be better partners. We share with them a passion to buy, build and hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing this goal.

Their method, at which they have been extraordinarily successful, is to buy companies that offer an opportunity for eliminating many unnecessary costs and then – very promptly – to make the moves that will get the job done. Their actions significantly boost productivity, the all-important factor in America’s economic growth over the past 240 years. Without more output of desired goods and services per working hour – that’s the measure of productivity gains – an economy inevitably stagnates. At much of corporate America, truly major gains in productivity are possible, a fact offering opportunities to Jorge Paulo and his associates.

At Berkshire, we, too, crave efficiency and detest bureaucracy. To achieve our goals, however, we follow an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by cost-conscious and efficient managers. After the purchase, our role is simply to create an environment in which these CEOs – and their eventual successors, who typically are like-minded – can maximize both their managerial effectiveness and the pleasure they derive from their jobs. (With this hands-off style, I am heeding a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to marry someone with the intent of changing their behavior.”)

We will continue to operate with extreme – indeed, almost unheard of – decentralization at Berkshire. But we will also look for opportunities to partner with Jorge Paulo, either as a financing partner, as was the case when his group purchased Tim Horton’s, or as a combined equity-and-financing partner, as at Heinz. We also may occasionally partner with others, as we have successfully done at Berkadia.”

Buffett prefers a much more friendly approach to buying businesses. He buys already efficient companies with great managers and lets them grow the business. 3G meanwhile buys inefficient businesses and takes the axe to them. Both results work, the 3G method involves firing a lot of people which is harder on the stomach.

The Early Results Are In – And They Are Fantastic

We are now just over a year into Kraft Heinz trading as a combined company. The share price has done very well especially year to date in 2016.

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