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Buffett awaits $8bn of ‘bad news’ with Kraft Heinz payment

Jun 01 2016 07:29

Seattle - Warren Buffett is about to get back the $8bn (R125.5bn) - plus a little extra - that his Berkshire Hathaway invested in Kraft Heinz.

“That will be good news for Kraft Heinz,” he wrote in his most recent annual letter to shareholders, “and bad news for Berkshire.”

It’s easy to see why. The packaged food giant is paying Buffett’s company 9%, or $720m annually, on the stake - an attractive return at a time when the billionaire has struggled to find large investments, and the cash on Berkshire’s balance sheet earns almost nothing.

Kraft Heinz has already moved to lower its financing costs. Last week, the company sold $7bn bonds in euros and dollars with interest rates that ranged from 1.5% to 4.375 percent for the longest-term debt.

CEO Bernardo Hees has been shutting factories and slashing jobs to cut $1.5bn in annual costs by 2017, following a playbook he used at H.J. Heinz to produce some of the industry’s best margins. Kraft Heinz has made a bigger push into mustard and barbecue sauce, aiming to round out its slate of condiments, while removing artificial colours and flavours from Kraft Macaroni & Cheese.

Buffett’s value

Kraft Heinz has gained 16% this year through the close of trading on Friday, outperforming the S&P 500 packaged food index, which is up 6.8%. The lower financing costs will help free up cash for marketing and product innovation, said Asit Sharma, an analyst at the Motley Fool.

“Buffett’s value came in his endorsement of the deal, and that vote of confidence has already been realized in the stock price,” he said. “Now it makes sense to optimise cash flows.”

Buffett got the $8bn of preferred shares in 2013 as part of a deal with buyout firm 3G Capital to take Heinz private. Two years later, the ketchup maker combined with Kraft Foods Group, forming one of the largest packaged-food companies in the world. Berkshire and 3G are the controlling shareholders.

The 2013 deal allowed the foodmaker to pay a premium to redeem the preferred shares after three years, a period that expires next week. Buffett has said Berkshire will get about $8.3bn, replenishing its coffers after the purchase of manufacturer Precision Castparts in January, one of his biggest buyouts ever.

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