Warren Buffett, Berkshire Hathaway, breaks down the terms of the deal to acquire Kraft Foods Group.
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On March 25, 2015, Warren Buffett, Chairman of the Board of Berkshire Hathaway Inc., participated in a telephone interview on CNBC. A transcript of a portion of the interview follows:
BECKY QUICK: That story this morning is that Heinz and Kraft are merging. Heinz actually buying a controlling stake of the company. 51%. The deal is being financed by a $10 billion investment from 3G Capital and Berkshire Hathaway. Joining us right now on the Squawk Newsline is Berkshire Hathaway’s Chairman & CEO Warren Buffett. And Warren, thank you for joining us this morning.
WARREN BUFFETT: Delighted.
QUICK: You warned us in your annual letter to shareholders that you were still on the hunt. You even mentioned that you’d be looking forward to doing things with 3G in the future. How long has this been in the works?
BUFFETT: It’s probably been in the works about four weeks or so. Something like that. It moved along quite promptly.
QUICK: That is a fast deal. And it’s relatively complicated. This is not a straight buyout. This is a situation where 3G and Berkshire through Heinz are going to be taking a 51% stake in a newly combined public company of Kraft and Heinz. There is also a special dividend that comes out from a $10 billion payment. How did you come up with the structure?
BUFFETT: Well, it was a matter of negotiation. And it’s correct that 3G and Berkshire Hathaway will invest $10 billion in Heinz just prior to the deal. And then that money essentially will be paid out in a $16.50 share dividend to the Kraft shareholders before the – immediately before the deal is completed. And then there are presently about 600 million Kraft shares outstanding. After the deal, there will be roughly a billion 220 million or so of which 3G and Berkshire Hathaway will own combined 51% and the present Kraft shareholders will keep their shares and own about 49%.
ANDREW ROSS SORKIN: Warren, we have been trying to do the math on your profit thus far on Heinz unto itself. It looks it could – have you made five times your money already?
BUFFETT: No, no, we – because we put in $4.25 billion to buy common stock of Heinz initially. And then we’re putting in another – we’re putting in a little over $5.2 billion, because we have about 53% of Heinz coming out. So we’re putting in another $5.2 something billion. So we will have $9.5 billion roughly in the common stock. And we’ll own 320 odd million shares of the new company. But of course, the stock you’re looking at will go ex-dividend $16.50 at some point before we receive our shares in the new company. So we will have 320 plus million shares, roughly, in the new Kraft/Heinz. And that will be the present Kraft stock plus a $16.50 special distribution to the present Kraft shareholders.
SORKIN: So as Berkshire Hathaway shareholders try to just gauge the valuation of their stake in all of this, relative to where you were in Heinz before, what’s your math?
BUFFETT: Well, we will – if we own 320 million-plus shares in the new company, and we paid $9.5 billion, we will have paid a little less than $30 a share for our stock. In the new Kraft/Heinz company.
QUICK: That stock closed, the Kraft shares closed at $61.33 yesterday. They are indicated to open today around $83.60, but as you mentioned, that is before the ex-dividend of the special one-time payout.
BUFFETT: Right, right. But – go ahead.
SORKIN: Warren, one of the other questions that we had about this is, you know, clearly, you’ve done a remarkable job. And 3G’s done a remarkable job at cutting costs, and at raising margins at Heinz and ostensibly can hopefully do the same thing at Kraft. And so in the short-term, great investment case. Question that was raised by some other analysts and actually by Jim Cramer is the long-term of Kraft, packaged foods, packaged goods, and in a world moving towards all natural thing and less packaged goods, what you think that portends?
BUFFETT: Yeah well, the short term doesn’t make much difference to us because we will be in this stock forever. This is a business with us, it’s not really a stock. And it’s a company that we will own 26 and a fraction percent of. So it’s where the new Kraft/Heinz company is 10, 20, 50 years from now that counts to Berkshire Hathaway and I like the brands. And I like the management a whole lot. And I think we’ll do fine over time. But that, you know, we will see how much Philadelphia cream cheese and Oscar Mayer hot dogs and a whole host of other products people were eating 10 or 20 or 30 years ago. But I first went into General Foods on behalf of Berkshire Hathaway in the early 1980s. I think maybe we were the largest shareholder – Berkshire Hathaway was the largest shareholder of General Foods. And these brands at Kraft, a lot of them come out of that General Foods hole in so these are brands that I liked 30-plus years ago. And I like them today. And I think I’ll like them 30 years from now.
QUICK: Warren, your tastes are well-known. We know that you like things that most 5 year olds like at their birthday parties. But some moms these days are not as eager to feed their kids food that they don’t feel is absolutely natural coming from other places. They don’t like preservatives in their food. That is where the question comes up.
JOE KERNEN: That was kind of a slam, Warren. From where I’m sitting. I don’t know. Like a 5-year-old at a birthday party.
QUICK: He said that himself.
KERNEN: Well I know, but I think that’s a compliment. You sort of said it. I don’t know.
BUFFETT: Well, there’s 7 billion people in the world that all have different tastes. But the taste that Kraft – and Heinz for that matter – have appealed to, you know, over many, many decades. I think Heinz goes back to 1869. I think those tastes are enduring. There will be plenty of people that want to eat other things. But there are plenty of people that want to eat the products that Kraft/Heinz turns out. And there are new products coming all the time. At Heinz, we have at least four new products that we will be hitting the shelves with this year. So it’s not a static operation at all. And we’ve got