“That will be good news for Kraft Heinz,” he wrote in his most recent annual letter to shareholders, “and bad news for Berkshire.”
It’s easy to see why. The packaged food giant is paying Buffett’s company 9 per cent, or $720 million annually, on the stake – an attractive return at a time when the billionaire has struggled to find large investments, and the cash on Berkshire’s balance sheet earns almost nothing.
Kraft Heinz has already moved to lower its financing costs. Last week, the company sold $7 billion bonds in euros and dollars with interest rates that ranged from 1.5 per cent to 4.375 per cent for the longest-term debt.
Chief Executive Officer Bernardo Hees has been shutting factories and slashing jobs to cut $1.5 billion in annual costs by 2017, following a playbook he used at H J Heinz to produce some of the industry’s best margins. Kraft Heinz has made a bigger push into mustard and barbecue sauce, aiming to round out its slate of condiments, while removing artificial colours and flavours from Kraft Macaroni & Cheese.
Kraft Heinz has gained 16 per cent this year through the close of trading Friday, outperforming the S&P 500 packaged food index, which is up 6.8 per cent. The lower financing costs will help free up cash for marketing and product innovation, said Asit Sharma, an analyst at the Motley Fool.
“Buffett’s value came in his endorsement of the deal, and that vote of confidence has already been realised in the stock price,” he said. “Now it makes sense to optimise cash flows.”
Buffett got the $8 billion of preferred shares in 2013 as part of a deal with buyout firm 3G Capital to take Heinz private. Two years later, the ketchup maker combined with Kraft Foods Group, forming one of the largest packaged-food companies in the world.