Warren Buffett is focusing on Kraft Heinz looks like an acquisition stumbles with a fuzzy path ahead.
Buffett has wanted to make a big acquisition, but he has said he has seen such deals as expensive and he has moved cautiously. Lessons from the Kraft Heinz Agreement and how it has compared to other similar transactions can illustrate why he has moved slowly in using Berkshire's massive cash table, which had grown to $ 112 billion by the end of last year. He noticed CNBC it was "very hard" to offer a prize for a packed food company, noting that the industry is more difficult than it was ten years ago.
Earlier, when Buffett put his money where the Americans mouth is, he has seen success. His efforts on candy and gums raked in millions. Berkshire helped fund the M&M owner Mars & # 39; acquisition of Wm. Wrigley Jr., producer of extra gum and altoids, for $ 23 billion in 2018. When he sold out of the company in 2016, he had earned at least $ 680 million from the deal and about $ 840 million from his preferred stock
Parallel To draw between the two deals is easy: both offered iconic brands Americans enjoyed eating.
"These are the brands I liked 30 plus years ago and I like them today. And I think I would like them 30 years from now," Buffett told CNBC's Becky Quick shortly after the Kraft Heinz agreement was announced. .
But the paths for both companies since their deals have been diametrically divergent and that have, so far, the return on the billionaire's investment.
The contrast in wealth can be attributed to many forces. Even though the flavors have changed, consumers are more willing to pay for their favorite chocolate brand than they are for cheese. Today's indulgence is more likely to be a small and snack bar, like a bag of M&M or Twix candy bar, and they are less likely to include processed foods like an Oscar Meyer Bologna sandwich.
Led by the Mars family, the company has decades of experience in running the confectionery market, which also includes a petcare business. Kraft Heinz is led by 3G Capital, the private equity firm that has proved itself in dealmaking and cost-saving, but not yet in running the daily operations of a food company.
But there is another strength at stake, which speaks wider to the press against the consumer industry in general: Mars is a private company while Kraft Heinz is public. Unlike the confectionery giant, Kraft Heinz has had to fight the changes in the consumer industry during the public pressure in the quarterly revenues.
For any company, this limelight can be hard; For a food company in recent years, it has been almost impossible. Companies from General Mills, Campbell and Kraft Heinz are grabbing large portfolios of brands that the Americans no longer eat. Sales across food companies are generally stagnant or declining, forcing many of them to take large, expensive games.
Kraft Heinz used to get a passport from investors, who bought shares that expected to find growth through dealmaking and cost reduction. But as dealmaking has slowed down and cost savings have gone dry, investors are penalizing themselves for not being better than their peers.
Like all major food companies, it is now firmly in the precarious position to fight with low growth and rising costs in the public eye. Making any demonstrable change in brand and portfolio to appeal to today's consumers is likely to be at the expense of quarterly revenue and immediately reap the penalty.
However, Mars is owned by the Mars family, which has run its $ 35 billion long-distance business. Without investor's review, Mars made long-term investments in its chocolate business, such as spending $ 100 million on caramel M & Ms. It also made changes for the future, and paid $ 9 billion to the animal healthcare company VCA as Mars's eyes, a firm grip on the cultivation industry.
The contrast between a company in the long term rather than short is one that Buffett is well known for. Buffett, an opponent of quarterly earnings guidance, took a turn to steer the quarter in this year's annual letter.
"Charlie and I have seen all sorts of bad business behavior, both accounting and operational, induced by management's desire to meet Wall Street expectations. What begins as an" innocent "fudge for not disappointing" Street "- trade-loading in the quarterly, blind eye to increasing insurance losses or pulling down a "cookie jar" reserves – can be the first step towards full-fledged fraud. "
In fact, Kraft Heinz earlier this week showed that it was the goal of a US Securities and Exchange Commission investigation of" accounting policies, procedures, and internal controls. "It has said that it is taking certain steps to" limit "the risk to make mistakes in the future.
Details of the nature and remedies around the survey are vague, and there is no evidence that it is anything but an honest mistake.
"We continue to fully cooperate with the SEC, and at this point, the company does not expect material that is the subject of the investigation to be material, "said a Kraft spokesman in a statement.
Still not fully absorbing costs each quarter is one way companies have previously helped increase their quarterly performance – and that may be the kind of behavior Buffett has warned against.
He told investors at a shareholder meeting in 1995 that when they invested "the most important thing [is] is trying to fin ne a business with a long and long-standing moat around it … protecting a fantastic financial castle with an honest gentleman in charge of the castle, "according to a clip found by CNBC's Warren Buffett Archive.
It was a time when a blue box of Kraft Mac & Cheese dinner or sausages was made, promoted with its own iconic touring "Weinermobile", as the right fortress to claim, but it can Don't be the case anymore.