3/15/2019 Warren Buffett: I Overpaid for Kraft Heinz - WSJ

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BUSINESS

Warren Buffett: I Overpaid for Kra Heinz

Berkshire Hathaway doesn’t plan to change its ownership stake in Kraft Heinz despite the struggles, he
says

Berkshire Hathaway Chairman and CEO Warren Bu ett said he wouldn’t buy more Kraft Heinz, even after its share prices
slumped last week, because ‘it isn’t worth as much.’ PHOTO: NATI HARNIK ASSOCIATED PRESS

By Nicole Friedman
Updated Feb. 25, 2019 5 23 p.m. ET

Warren Buffett said Berkshire Hathaway Inc. BRK.B 0.46% ▲ and 3G Capital overpaid in 2015
when they helped form Kraft Heinz KHC 0.69% ▲ Co., but he has no plans to sell.

The acknowledgment, made during a CNBC interview Monday, followed a disclosure Saturday
that Kraft Heinz contributed a $2.7 billion loss to Berkshire in 2018. Kraft Heinz last week wrote
down the value of some of its biggest brands, disclosed an investigation by federal securities
regulators and slashed its dividend.

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3/15/2019 Warren Buffett: I Overpaid for Kraft Heinz - WSJ

Berkshire owns 27% of Kraft Heinz. Mr. Buffett said Berkshire doesn’t plan to change its stake.

“We don’t pull the plug,” Mr. Buffett said. Kraft Heinz is still a good business, he said, but he and
3G were overly optimistic about the value of its brands when they invested in 2015. “The
business does not earn more because you pay more for it,” he said.

The abrupt decline of Kraft Heinz offers a new test for Mr. Buffett’s relationship with 3G.
The Omaha, Neb., billionaire has received heat for his ties to a private-equity giant that
some Berkshire shareholders see as incompatible with Berkshire’s values. Berkshire is known
for letting its business managers set their own strategies, while 3G has a reputation for
aggressive cost-cutting and layoffs.

“When he first started working with 3G, I didn’t understand it,” said Paul Lountzis, president of
Lountzis Asset Management LLC, which owns Berkshire shares. But “with his loyalty and
integrity, he’s not going to walk away.…I think the only thing he can do is support them and
hope they’ll be able to make the necessary adjustments and help the business.”

Mr. Buffett has repeatedly defended 3G and said its strategy differs from Berkshire’s because 3G
buys inefficient companies that need to improve while Berkshire buys companies that already
run efficiently. He stood behind 3G again on Monday, offering praise for 3G co-founder Jorge
Paulo Lemann. Mr. Buffett has known Mr. Lemann for decades.

“I’m certainly happy to be Jorge Paulo’s partner,” Mr. Buffett said. “He’s a terrific human being,
and very smart on business.”

Berkshire’s and 3G’s $23.6 billion purchase of H.J. Heinz Co. in 2013 was Berkshire’s biggest deal
since its 2010 acquisition of Burlington Northern Santa Fe Corp. for $26.7 billion. Berkshire had
been under pressure for years to announce ever bigger acquisitions as its businesses continued
to churn out cash for Mr. Buffett to invest.

Mr. Lemann invited Mr. Buffett to join the Heinz deal, The Journal reported at the time. Messrs.
Lemann and Buffett met in 1998 on the board of razor maker Gillette Co.

For Mr. Buffett, 3G offered a new source of megadeals at a time when he was struggling to find
well-priced acquisition targets that fit his criteria. Mr. Buffett avoids buying companies that
require hands-on management or strategy changes, and working with 3G expanded the
universe of companies that Berkshire could invest in.

But the relationship also brought reputation risk to Mr. Buffett, who is popular globally for his
folksy charm and investing success.

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Berkshire and 3G each bought more than $4 billion in Heinz stock as part of the deal, and
Berkshire spent another $8 billion in preferred stock that paid a 9% dividend. Berkshire and 3G
didn’t overpay for the 2013 deal, Mr. Buffett said Monday.

Mr. Buffett partnered with 3G again the following year, when Berkshire helped finance Burger
King Worldwide Inc.’s takeover of Tim Hortons Inc. 3G was Burger King’s controlling
shareholder at the time. Berkshire paid $3 billion for preferred shares that paid a 9% dividend.

In 2015, Berkshire and 3G financed Heinz’s merger with Kraft Foods Group Inc., each
contributing $5 billion to fund a special dividend for Kraft shareholders. Kraft Foods later paid
$8.3 billion to redeem Berkshire’s preferred shares from the Heinz deal.

At Berkshire’s annual
RELATED COVERAGE meeting in 2015,
shareholders asked
It Shook the Food Business by Snagging Burger King, Kraft and Heinz. Now 3G Is Reeling.
multiple questions
Kraft Heinz Was a Classic Bet for Warren Buffett. Then It Soured.
about the company’s
Warren Buffett’s Kraft Heinz Bet Dragged Down Berkshire Hathaway in 2018
relationship with 3G.
Berkshire’s Stock Gets Caught in the Kraft Heinz Swoon
One shareholder asked
whether Mr. Buffett no
longer “aspired to balance capitalism and compassion.”

Berkshire and 3G tried to team up again in 2017 when Kraft Heinz made a $143 billion takeover
offer to Unilever PLC. Berkshire and 3G each would have contributed $15 billion to the deal, Mr.
Buffett has said, but Unilever declined the offer. Mr. Buffett has long said he won’t make hostile
bids.

Mr. Buffett said on CNBC that Kraft Heinz’s recent struggles were the result of a loss of
bargaining power with retailers. He compared Kraft Heinz with Costco Wholesale Corp.’s
Kirkland brand to demonstrate how the retail environment is changing. Kraft Heinz traces
many of its brands back to the 19th century, while Kirkland launched in recent decades. But
Kirkland’s sales exceeded Kraft Heinz’s last year, he said.

“So here they are, 100 years plus tons of advertising, built into people’s habits and everything
else, and now Kirkland, a private-label brand comes along with only 750 outlets, does 50% more
business,” Mr. Buffett said.

Berkshire Hathaway owns about 1% of Costco, according to FactSet.

Write to Nicole Friedman at nicole.friedman@wsj.com

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