BRK.B Berkshire Hathaway Inc

By Nicole Friedman 

Kraft Heinz Co. was a classic Warren Buffett bet in many ways: an easy-to-understand company stocked with iconic American brands.

"This is my kind of transaction," the Omaha, Neb., billionaire said during the 2015 merger of H.J. Heinz Co. and Kraft Foods Group Inc., "uniting two world class organizations and delivering shareholder value."

The abrupt decline of that value demonstrates that even Mr. Buffett's long-successful investment philosophy is vulnerable to sudden shifts in consumer taste.

Mr. Buffett's Berkshire Hathaway Inc. said Saturday it swung to a $25.4 billion loss in the fourth quarter due to an unexpected write-down last week at Kraft Heinz Co. and unrealized investment losses. Berkshire owns 27% of Kraft Heinz.

Kraft Heinz's $15.4 billion write-down was an acknowledgment that the Kraft and Oscar Meyer brands haven't performed as well as expected. Consumer tastes are shifting toward healthier or more-natural ingredients and away from processed foods.

Berkshire's fourth-quarter loss dragged down the conglomerate's net earnings to $4 billion in 2018 from $44.9 billion the prior year. Berkshire's operating earnings, which exclude impairments and unrealized investment results, rose to a record $24.8 billion in 2018, up from $14.5 billion the prior year.

Mr. Buffett has long bet that strong consumer brands will help companies maintain market share and pricing power. Some of his biggest equity holdings, including Apple Inc. and Coca-Cola Co., are household names. Berkshire also owns a number of classic American companies, including Dairy Queen, Geico, Duracell and Fruit of the Loom.

"Kraft represented the classic Berkshire company...where you buy the solid brands that have repeated and dependable cash flow, and all is great," said Cathy Seifert, equity analyst at CFRA Research. "It's valid to question what's the go-forward strategy."

Mr. Buffett didn't discuss Kraft Heinz in his annual letter to shareholders released Saturday, but he acknowledged the challenges facing the packaged-food business on CNBC in August.

"It's very hard to offer a significant premium for a packaged-goods company and have it make financial sense," Mr. Buffett said. "Branded packaged goods are a very, very, very good business in terms of return on tangible assets. But they're not a sensational business in terms of where you could be five or 10 years from now."

Mr. Buffett's big bet on the snack business started in 2013, when Berkshire teamed up with Brazilian private-equity firm 3G Capital to buy Heinz. Berkshire and 3G helped finance the merger between Kraft and Heinz in 2015.

As Berkshire has grown, Mr. Buffett has come under increasing pressure to spend its massive cash pile on acquisitions and investments. Berkshire hasn't done a major deal in three years, and Mr. Buffett has struggled to find reasonably priced large companies to buy.

Berkshire's cash, which is mostly invested in Treasury bills, grew to almost $112 billion at year-end, marking the sixth straight quarter above $100 billion.

Mr. Buffett offered no specific guidance in his annual letter on how he may use his growing pile of cash. He expects to move "much of our excess liquidity into businesses that Berkshire will permanently own" but prices are still too high, he wrote. "We continue, nevertheless, to hope for an elephant-sized acquisition."

Berkshire repurchased a bit over $400 million of its stock in the fourth quarter, down from $928 million in buybacks in the third quarter. Investors were hoping Berkshire would spend a significant chunk of its cash buying back shares.

Some shareholders have questioned whether Berkshire will buy more of Kraft Heinz now or acquire the entire thing. Berkshire could also help finance future acquisitions by Kraft Heinz. Berkshire valued its Kraft Heinz stake at $13.8 billion in 2018, down from $17.6 billion the prior year. Berkshire's cost basis for the investment was $9.8 billion.

Two Berkshire employees sit on Kraft Heinz's board: Greg Abel, vice chairman for noninsurance business operations and one of two candidates to succeed Mr. Buffett as chief executive, and Tracy Britt Cool, CEO of Berkshire subsidiary Pampered Chef and Mr. Buffett's former financial assistant. Mr. Buffett retired from the Kraft Heinz board in April as he cut back on travel commitments.

"I wouldn't want Warren Buffett to be allocating more capital under the umbrella of Kraft Heinz and 3G," said David Rolfe, chief investment officer of Wedgewood Partners Inc. in St. Louis, which holds Berkshire shares. "I would much rather see Warren spend tens of billions buying back his own stock."

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

(END) Dow Jones Newswires

February 24, 2019 13:23 ET (18:23 GMT)

Berkshire Hathaway (NYSE:BRK.B)
Gráfica de Acción Histórica
De Jun 2024 a Jul 2024

Berkshire Hathaway (NYSE:BRK.B)
Gráfica de Acción Histórica
De Jul 2023 a Jul 2024