Counterparties: How Warren Buffett sweetens his ketchup
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Warren Buffettâ€™s near-mythic status means his deals are always scrutinized for signs that the old man has finally lost his edge. Berkshireâ€™s $12 billion role in the $23 billion acquisition of Heinz is no different. First, consider the dealâ€™s debt. Excessive leverage has long been one of Buffettâ€™s bugaboos. YetÂ Peter Eavis notes that the deal doubles Heinzâ€™s debt load, from $5 billion to $10 billion. As a consequence, the companyâ€™s â€ścredit rating will almost certainly be slashed into junk territoryâ€ť.
Eavis also wonders why Buffett didnâ€™t just buy Heinz stock in the open market. Instead, the deal contains Buffettâ€™s favorite corn syrup-free sweetener: heâ€™ll receive 9% on $8 billion worth of preferred stock. Weâ€™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 Buffettâ€™s portion of the deal is a good one: heâ€™ll get the yield on the Â preferred stock, and at the acquisition price, his $4 billion in common equity yields about about 3%, Elfenbein calculates.
Lex doesnâ€™t think the yield mitigates the fact that Buffett deserves a â€śstern lecture in overpayingâ€ť. If you own the company, they point out, Buffettâ€™s yield amount to extracting value from yourself. But as Steve Waldman points out, Buffett doesnâ€™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 isnâ€™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 â€śbit hypocriticalâ€ť. But all that is easily forgotten when Olâ€™ Uncle Warren talks about how much he loves ketchup in an interview.Â Warren Buffettâ€™s public persona, no less than Heinz’s ketchup, is a formula scientifically proven to be perfect. — Ben Walsh
On to todayâ€™s links:
Carl Icahn seems to taken a massive position in Herbalife just to piss Bill Ackman off -Â Kid Dynamite
The new P/E ratio: “Price-to-ego” -Â Josh Brown
Who wants to buy some Singaporean penny stocks?! -Â WSJ
Mayonnaise tweets, the key to unlocking shareholder value -Â Ben Walsh
Meet the guy who’s investing $24 billion of George Soros’s money – WSJ
Michael Lewis reviews a novel that’s sort of about the financial crisis -Â NY Review of Books
No one appears to know what really happened during a rather boring Tesla test drive by the NYT – NYT