Counterparties: How Warren Buffett sweetens his ketchup

By Ben Walsh
February 15, 2013

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

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

On to today’s links:

Leaders
Silvio Berlusconi: “Bribes are necessary – they are not crimes” – Zero Hedge

Not the Onion
Moody’s downgrades S&P – Bloomberg

Popular Myths
Almost nobody cares about the deficit we’ve all been told to care about – Evan Soltas

Alpha
Carl Icahn seems to taken a massive position in Herbalife just to piss Bill Ackman off - Kid Dynamite
The new P/E ratio: “Price-to-ego” - Josh Brown
Who wants to buy some Singaporean penny stocks?! - WSJ
Mayonnaise tweets, the key to unlocking shareholder value - Ben Walsh
Meet the guy who’s investing $24 billion of George Soros’s money – WSJ

Ouch
Investors withdraw 1/3 of SAC’s outside capital – Bloomberg
RIM CEO is so impressed by the new BlackBerry that he dumped all of his shares in the company – Venture Beat

Oxpeckers
Michael Lewis reviews a novel that’s sort of about the financial crisis - NY Review of Books
No one appears to know what really happened during a rather boring Tesla test drive by the NYT – NYT

Good Points
“Infrastructure”: one of those meaningless terms that almost no one thinks about critically – Jack Shafter

Shocking
The Tiffany engagement ring you bought at Costco is probably fake – WSJ

Wonks
Manufacturing hubs are actually a pretty good idea – Brookings
“Economics is not physics or engineering: there are few if any stable, reliable parameters.” – Chris Dillow

Investigations
SEC investigating increased options trading ahead of Heinz takeover – Dealbook

Comments
6 comments so far

so buffett overpaid john kerry by 20% for heinz; however, he’ll get more than that back when kerry blocks the keystone XL, cause buffett owns most of the railroads & oil tanker rolling stock west of the mississippi…

Posted by rjs0 | Report as abusive

How would John Kerry block Keystone XL? He’s the Secretary of State, our chief diplomat. He has nothing to do with the Dep’t of Interior, the EPA, or any of the other agencies overseeing oil pipelines. Paranoid, much?

Posted by Auros | Report as abusive

Michael Lewis’ review of John Lanchester’s novel is great.
But when Lewis writes:

“Lanchester has turned himself into one of the world’s great explainers of the financial crisis and its aftermath. He has a gift for taking a reader who knows nothing about a complicated topic and leaving him with the feeling that he knows all about it, or at least everything worth knowing. He makes you feel smarter than you are”

–Lewis isn’t talking about Lanchester — he’s talking about himself.

Posted by TBV | Report as abusive

Teresa Heinz Kerry doesn’t even own any Heinz stock any more. The family foundation sold it off a decade ago in a secondary public offering.

Posted by TFF | Report as abusive

“Economics is not physics or engineering: there are few if any stable, reliable parameters.”

Please include this in all articles and posts when discussing economists’ proposals. They are not scientists, they are artists. They may employ very complex calculus, but its usually meaningless, as their models are only rough guesses. They can’t even measure response accurately enough to know if their solutions are working.

Posted by KenG_CA | Report as abusive

I agree that the notion that Buffett’s Heinz deal is somehow tied to the Keystone XL pipeline is a ridiculous, illogical conspiracy theory. That said, Keystone XL does require State Department approval because it crosses the Canadian border.

Posted by realist50 | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/