According to Warren Buffett on CNBC, the Kraft Heinz merger will result in Berkshire Hathaway owning 320 million shares of the combined company when it is expected to close during the second half of 2015. At Kraft’s (KRFT) closing price on March 27 of $89 per share, after a $16.50 cash dividend to current KRFT shareholders, the resulting price of $72.50 implies a valuation of about $23 billion for Berkshire’s stake in this company. This will represent Berkshire’s second largest common stock investment, trailing only Wells Fargo ($26 billion). Since Berkshire will own 26% of Kraft Heinz, the new company is being valued at about $90 billion.
Inside the Head of Warren Buffett
Mar 02, 2015
SMITH BRAIN TRUST — Warren Buffett’s annual letter to Berkshire Hathaway shareholders, for 2015, reflects on the company’s 50 years of success and looks ahead. The Wall Street Journal called on David Kass, clinical associate professor of finance at the University of Maryland’s Robert H. Smith School of Business, to help its readers better understand the 25,000-word manuscript.
Kass, a Berkshire shareholder, also explained to CNBC Squawkbox Asia anchors Bernie Lo and Susan Li why Berkshire manager Ajit Jain is Warren Buffett’s “first choice” as his successor. Hours later — early Monday — Buffett sat down with CNBC for a wide-ranging exclusive interview. Kass boiled the three hours down to 16 essential points for the blog ValueWalk.
For WSJ, Kass and other experts each expanded on a different passage from Buffett’s letter. Kass tackled the following from Berkshire Hathaway’s chairman: “So what do Charlie and I find so attractive about Berkshire’s conglomerate structure? To put the case simply: If the conglomerate form is used judiciously, it is an ideal structure for maximizing long-term capital growth”
Kass’ response: “Conglomerates — companies with diverse unrelated businesses — can provide the optimal mechanism for efficiently allocating capital, which is the principal role for a CEO. Berkshire’s conglomerate structure permits Warren Buffett, for example, to reallocate surplus cash flow from one business, such as insurance, to another business, such as the railroad, where additional capital may be needed for plant and equipment to improve its performance.
“If Berkshire was not able to reallocate its capital internally among its various businesses, it might have to raise external capital through either debt or equity financing and incur additional investment banking related costs associated with these transactions. It would incur additional interest payments for debt or dilute the ownership stake of its stockholders by issuing equity. In addition, Berkshire moves its funds internally in a tax — efficient manner by not incurring capital gains taxes when moving its funds from one business to another. By eliminating transaction costs and taxes, Berkshire is able to maximize its long-term capital growth. Furthermore, it is this freeing up of excess cash flow from Berkshire’s 80 businesses that provides the source of funds for Berkshire to acquire or invest in other companies which has been a major source of its growth.”
The entire WSJ piece is here.
Kass also commented for Omaha World Herald coverage related to Buffett’s letter:
- ‘Refreshing,’ puzzling: Analysts weigh in on Berkshire Hathaway letter
- Berkshire Hathaway built to last, Warren Buffett tells shareholders
- In many ways, Berkshire already employs better executives than Buffett
- Service problems in 2014 give BNSF (Railroad) ‘a lot of work to do’
– See more at: http://www.rhsmith.umd.edu/news/inside-head-warren-buffett
Warren Buffett was interviewed on CNBC on March 2, 2015 from 6 a.m. – 9 a.m. eastern time. These are some of the highlights:
(1) Warren Buffett added to his IBM position in the fourth quarter of 2014 even though its current price of $161 is below his average cost of $170 (purchased in 2011). He prefers that the price goes down so he can buy more at the lower price. IBM,as well, buys back more shares (for a fixed dollar amount) at the lower price.
(2) Buffett sold Exxon Mobil (XOM) in the fourth quarter of 2014 because he had “other uses for the money” (other stocks or deals).
(3) Both Buffett and one of his portfolio managers (Fortune Magazine: Todd Combs) invested in Deere (DE), which will have a few tough years ahead but will do fine over 10 years.
(4) Investors should not buy stocks because he (or anyone else) does. They should do their own research or buy low cost index funds starting early in life and add over time.
(5) BNSF (railroad) had poor on-time performance in 2014, but improved in the fourth quarter. It is making large capital investments to improve its future performance.
(6) Warren Buffett, Todd Combs, and Ted Weschler evaluate how businesses will do over the next 5, 10, and 20 years. They have lunch once a week and learn from each other.
(7) The economy is improving, with real growth at 2% and population growth at 1%. Housing’s recovery is slower than he expected, but automobile sales are growing faster.
(8) Recommends the earned income tax credit to reduce income inequality. The market sets wages (WalMart’s wage increase)
(9) Expects Hillary Clinton to run and win. Criticized Elizabeth Warren for being angry at people whom she has to work with to get things done.
(10) Thinks Senators Hatch and Wyden can agree on corporate tax reform.
(11) CEO Mary Barra is doing a good job at General Motors.
(12) David Winters should not be criticizing compensation at Coca-Cola when he receives 1 1/2% for consistent underperformance over 5 years or longer.
(13) The Euro Zone should not have a common currency with different governments and fiscal policies.
(14) Banks are doing a good job in the United States and represent a smaller percentage of the economy in the U.S. than elsewhere.
(15) We should have passed the Keystone Pipeline.
(16) The best days for America lie ahead.