Warren Buffett's Heinz Acquisition

Sorry about the lack of posts but have been busy the last few months—in fact, more like the last 2 years—but hope to be more involved in the future. Another reason I have been sort of out of the market is because I find it expensive and don't really see any great opportunities.

Anyway, just saw that Warren Buffett participated with private equity group, 3G, in the acquisition of Heinz (HNZ), and thought I would post my quick thought. As most of you may know, Heinz is famous for ketchup and various food products.

Similar to the railroad, Burlington Northern Santa Fe, that Warren Buffett acquired a few years ago, this deal to participate in the Heinz buyout looks expensive (the verdict is still out on the Burlington Northern Santa Fe investment). This Fortune opinion piece sort of has similar feelings. My opinion is that Buffett is running out of good opportunities and is willing to seek out slightly-above-average opportunities given the super-low interest-rate environment.

The deal is valuing Heinz at around 20x P/E for a low-growth, albeit very stable, business. However, Buffett is only putting up a portion of the funding in return for preferred shares yielding 9%, and a sizeable chunk that is owned by the 3G private equity group is going to be funded via debt. So, leverage is going to boost the returns for the buyout group, with all the debt risk being held by the 3G private equity group while Buffett only owns preferred and common shares.

 

From a risk point of view, this is a great deal for Buffett. Overall, this will produce above-average return but nowhere near superinvestor returns he had in his younger days. The investment likely yield 1% to 2% above S&P 500 in the long run and that is kind of Buffett's goal (he has alluded to this in his shareholder letters). Obviously, newbie and amateur investors trying to earn returns like 'Buffett Prime' won't learn much from this deal.