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.