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Author: carl777 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212983  
Subject: Re: FT: Buffett brand has more beans than Heinz Date: 2/19/2013 12:01 PM
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Many of the comments in this thread point to the elements of this deal that seem to give additional benefit to BRK, over and above the obvious 9% and 50% common stake. Some of these are:
"The leverage – which is very real for all the other parties – is largely illusory for Berkshire."
The terms of the warrants.
First refusal rights.
Maybe more.

However, there is yet-to-be released information that precludes us from doing a reasonably accurate analysis of the deals upsides/downsides for BRK and 3G. I.e.,
The average interest rate of the new and rolled debt?
The conditions under which the Preferred can be called?
The terms of the warrants?

None-the-less, based on what we do know, it looks like this will turn out to be a very good deal for BRK as well as 3G. But not as quickly as the Railroad moved from "lemon" in the mind of some to obvious winner.
The knee-jerk reaction of some, including the first FT editorial, was that WEB paid too high a price for a solid but stodgy-looking company. After all, the argument goes, he is buying into a slow grower at a 20% percent premium to its all-time high--he has clearly lost it.

Not surprisingly, I come to a different conclusion on two counts.

1. Although there are important specifics we do not know about the deal, the points discussed on this board point to the not yet quantified deal attributes, but highly likely to be long-term positives for BRK and for 3G. Even assuming the conservative 6%/year earnings growth without any operational improvements or the above unquantified benefits, it looks like BRK and 3G will do nicely over the long term. I have to believe that many of the unspecified points are to BRK's benefit.

2. More interesting to me is that, unlike most classic BRK deals of buying value and growth on the cheap, the big win for BRK appears to come from the Deal Structure. This portends well for the future deployment of the growing cash pile in an era of pretty fully or richly valued companies. After all, the price results in a nice win for the current shareholders; the creativity in the structure seems to result in a big long-term(5-10 years) win for not only BRK, but of all people, a private-equity partner. This means that the basket of potential deals, and partnerships, that BRK can consider going forward has now grown, maybe considerably, if we assume WEB will continue to turn the "Deal Structure" knob in ways which will help compensate for growth and valuation limitations. This would be a continuation of a trend that started with the GE and GS deals, followed by Bank of America. This is good news for those of us worried about how BRK is going to deploy in a good way its cash piles when market valuations are not so attractive.
Carl
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