Heinz / Kraft

Heinz are merging with Kraft.  What does this mean for Berkshire Hathaway?  I haven't seen a rigorous analysis in the press, so I thought I'd have a stab.


First, let's look at Berkshire's holdings in Heinz:

• They own 50% of the common equity, 425m shares, with a cost of $4.25bn.
• They hold $8bn of preference shares, paying 9% per year.
• They hold warrants for a further 46m common shares, exercisable at 1c per share.
• 3G hold the remainder of the equity.

A $10bn dividend is being paid to Kraft shareholders, funded by a common equity investment from Berkshire and 3G.  Let's assume the warrants are exercised as part of the transaction (don't know if that's true).  That leaves Berkshire holding 52.5% of Heinz and paying $5.25bn for the additional equity.


So Berkshire will have paid a total of $9.5bn.  Heinz shareholders will have 51% of the company.  So Berkshire will have 26.8% of the combined company.


Kraft are currently trading at $83.  Stripping out the $16.50 dividend that leaves $66.  There are 600m Kraft shares at the moment.  There will be around 1220m shares in Kraft Heinz.  Berkshire will hold around 320m of them.  The market is valuing Kraft Heinz at $80bn.  Berkshire's share of that is about $21bn.  Not bad.


When considering return on investment though:

• You can ignore the new $5.25bn that they are investing as part of the deal - that wasn't invested in 2013.
• You can't ignore the money invested in the preference shares, since this was key to doing the Heinz deal in the first place.

So realistically:

• They put in $12.25bn in 2013.
• They've received about $1.5bn in dividends on the preference shares.
• At the point of the deal they'll have $16bn in equity and $8bn in preference shares, so $24bn.

So a total return of about 100% over 2 years, for a very safe investment - the preference share component made it much less risky than a pure common stock investment.


Not bad!


But what about 3G?  They put in $4.25bn originally and $4.75bn now, and are getting 290m shares or $19bn.  On their original investment of $4.25bn they're making $14.4bn, or 240% over 2 years.


They made a riskier investment and got a correspondingly greater reward.

New investment F. W. Thorpe

A couple of days ago I invested a small amount in F. W. Thorpe, a small family company that designs, manufactures and sells lighting solutions in a variety of markets.

I bought my shares at 136p.  They form 3.3% of my portfolio.  I've been watching them for a while and decided to buy a few shares - I may buy more in future.  The market cap is £156m, revenue last year was £63m, profit after tax of £10m (nice margin), net assets £77m, of which £70m is tangible and about £34m is cash or equivalent (very conservative balance sheet).

They're not cheap, at a P/E of 15, but if you strip out the cash they look much more reasonable.

With regard to Tesco I decided to wait and hear their trading update before deciding whether to put some money back in - and the market clearly liked what it heard, so count that a missed opportunity.  Presumably the lack of mention of a rights issue was a big factor.  I originally bought them expecting downside protection, dependable dividends and upside potential of international growth.  I was wrong on all 3 of those, it seems.  Should I invest now as a recovery play?  I'm not sure they're cheap enough for that (and even less so at 210p than 188p).

Sale of BP

I bought BP at 379p per share in September 2011, when the oil price was $100 per barrel.  I've just sold it today at 403p per share, with the oil price under $50 a barrel.  Yes, for most of that period the share price was higher, touching 520p at one stage, so it's annoying I didn't sell earlier - but 520p is cheap with oil at $100, and 403p is expensive with oil at $50.

Sale of Tesco, IS15

For the record, since I include all buys/sells in this blog, over the last few days I sold:

• All my Tesco shares at £1.88, to crystallize the capital loss to offset 2014 income taxes.
• 13% of my IS15 bonds at £106.16, to raise some cash.

Review of 2014

Another year ends, and it's time to look at how my portfolio has performed.

Overall I'm up a little over 4%, or 7% with dividends.  In the same period the FTSE 100 is down just under 3%, or up about 0.5% with dividends included.  However, that 7% hides an extremely mixed bag of investments.

I had only 5 holdings at the start of the year, and I finished with 4.  In order by size of holding on 1st January 2014:

• Berkshire Hathaway were 34% of my portfolio at the start of the year, and they are up 34% (in sterling).  They're now 50% of my portfolio.
• IS15, my short-dated UK corporate bond ETF, was 25% of my portfolio, returned 4% (mostly in dividends) and is now 24% of my year-end holdings, after I sold a small number to raise cash.
• Tesco has had a shocker - from 18% of my portfolio down to nothing, because I sold on New Year's Eve to use the capital loss in my 2014 tax return.  I may buy them back again and hope for a recovery.  In all, even accounting for dividends, they lost 40% of their value over the year.
• My NatWest Preference shares were 15% of my holdings, now 19%, returning 10% in capital gain plus 7% in dividend payments.
• BP are down from 7.5% to 7% of my portfolio, returning -11% over the year.

If I'd sold Tesco on 1st January 2014 I would have been up 17.5% for the year.  If I'd sold Berkshire Hathaway instead I'd be down 7%.

I now face something of a dilemma - most of my shares look expensive, or at least not cheap:

• Berkshire Hathaway no longer looks cheap, trading at 1.66 times net assets.  A rough guide to fair value is 1.6 times.
• With oil prices under $60 per barrel, BP doesn't look cheap either.
• NWBD yields under 7%
• The Yield to Maturity (YTM) on IS15 is only 2.2%.

Ideally I'd like to keep my money in shares or bonds in the UK.  But the GBP/NOK exchange rate is better than it's been in years, and cash in Norway pays better than the UK.  So perhaps the smart move is to cash in my investments and move the proceeds to Norway.  Something for me to ponder in the months ahead.