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Stocks B / Berkshire Hathaway
|Subject: Re: Berkshire buys Heinz||Date: 2/14/2013 4:53 PM|
|Author: DrtThrwingMonkey||Number: 198606 of 228061|
Evaluate this deal as you would a bond investment.
$8bn preferred shares as perpetual nominal 9% plus $4.5bn equity at 5% plus inflation plus modest growth.
Home run? No. But a guy could do worse.
It is amazing how little detail about the deal Berkshire's PR put out. Because at first blush, it seems like a terrible deal: buying a slow-grower that was already trading at 18 times earnings, tack on a 20% premium, not full control because a bunch of Brazilian guys are involved, etc. The value guys' shirt-tearing posts almost write themselves: why not buy back more Berkshire shares? Walmart is at 15 times earnings, why not just buy more of that? Buffett is losing it, just because he thinks he understand ketchup is no reason to buy such a stodgy company at nosebleed valuations.
Then you start to see a few other things trickle in. These Brazilian guys are pretty sharp operators, they're the ones who turned AnBev into the giant it is now, with some serious operating chops. Berkshire is only buying $4.5 bn of equity in this deal. Heinz's ROE is already astronomical, going back as far as you like. The deal is financed with dollops of debt, so that equity investment is highly leveraged, both for 3G and for Berkshire. And Berkshire itself is the major provider of financing, at very juicy terms, 9% on $8 billion. It makes the GS/GE/BAC terms look chintzy, and they were done in times of financial distress, while this is done in a time when the market seems toppy and uses of cash seem hard to find. Just a while back, we were all worrying about where we could replace the 10% return on the $8 bn invested in GS and GE preferred shares, which were callable, and now we have, presto, $8 bn invested at 9% in perpetual bonds.
So put me in the home-run camp with Tilson and the the other giddy Berkshire perma-bulls. I don't know if Jim gets to be a card-carrying member, with "a guy could do worse", but I'll give him an honorary pass and chalk it up to a taste for understatement.
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