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Saturday, February 16, 2013

REUTERS: Counterparties: How Warren Buffett sweetens his ketchup



By Ben Walsh

FEBRUARY 15, 2013

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Warren Buffett’s near-mythic status means his deals are always scrutinized for signs that the old man has finally lost his edge. Berkshire’s $12 billion role in the $23 billion acquisition of Heinz is no different. First, consider the deal’s debt. Excessive leverage has long been one of Buffett’s bugaboos. Yet Peter Eavis notes that the deal doubles Heinz’s debt load, from $5 billion to $10 billion. As a consequence, the company’s “credit rating will almost certainly be slashed into junk territory”.
Eavis also wonders why Buffett didn’t just buy Heinz stock in the open market. Instead, the deal contains Buffett’s favorite corn syrup-free sweetener: he’ll receive 9% on $8 billion worth of preferred stock. We’ve seen Buffett pull the preferred stock move before, notably on his investments in Goldman Sachs and GE.
Eddy Elfenbein thinks that Buffett’s preferred stock is what makes the deal sensible. The transaction, struck at a 20% premium over the closing price of Heinz shares before the deal was announced, might be too rich if Buffett were only buying common stock. But Buffett’s portion of the deal is a good one: he’ll get the yield on the  preferred stock, and at the acquisition price, his $4 billion in common equity yields about about 3%, Elfenbein calculates.
Lex doesn’t think the yield mitigates the fact that Buffett deserves a “stern lecture in overpaying”. If you own the company, they point out, Buffett’s yield amount to extracting value from yourself. But as Steve Waldman points out, Buffett doesn’t really own the company, 3G does. Buffett, in other words, is cannily extracting value from his partner. Maybe all that is the price you pay to have Warren Buffett along for the ride.
Some parts of the deal might be classic Buffett, but the partner isn’t. Dan Primack notes that Buffett has been publicly critical of the private equity industry and comes to the conclusion that his partnership with 3G is “bit hypocritical”. But all that is easily forgotten when Ol’ Uncle Warren talks about how much he loves ketchup in an interview. Warren Buffett’s public persona, no less than Heinz’s ketchup, is a formula scientifically proven to be perfect. — Ben Walsh




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