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Legendary investor Warren Buffett, the founder of investment behemoth Berkshire Hathaway (BRK-A, BRK-B), took a big hit on Kraft Heinz (KHC) stock. But he may still be in the money on the investment.
On Thursday, Kraft Heinz missed analysts' forecasts for its most recent quarter, posting a surprise net loss. The packaged food company that makes products such as ketchup and macaroni and cheese also delivered weak guidance; disclosed a massive $15.4 billion non-cash impairment charge mostly tied to Kraft and Oscar Mayer brands; revealed it received an SEC subpoena related to its accounting practices; and announced a dividend cut.
Shares of Kraft Heinz fell nearly 27.5% on Friday, falling $13.23, to end the week at $34.95 per share, an all-time low.
Buffett’s Berkshire Hathaway owns nearly 27% of Kraft Heinz common shares, a stake of 325.6 million shares.
In his widely-read annual letter released on Saturday, Buffett said Berkshire took “a $3.0 billion non-cash loss from an impairment of intangible assets (arising almost entirely from our equity interest in Kraft Heinz).”
Buffett didn’t delve into much detail on the Kraft Heinz investment other than noting at the end of 2018, the holding “had a market value of $14 billion and a cost basis of $9.8 billion.”
Assuming the position hasn’t changed, it’s possible Buffett is still in the money today. According to our calculations, the Kraft Heinz stake is currently valued at $11.38 billion based on Friday’s closing price, about $1.58 billion above Buffett’s cost basis for the shares.
Buffett said his Heinz bet was alike a private equity transaction
Buffett's investment in Kraft Heinz dates back to 2013 when 3G Capital, a firm led by Buffett's friend Jorge Paulo Lemann and associates Alex Behring and Bernardo Hees, asked Berkshire to team up as a financing partner to buy a majority interest in Heinz.
"In that role, we purchased $8 billion of Heinz preferred stock that carries a 9% coupon but also possesses other features that should increase the preferred’s annual return to 12% or so. Berkshire and 3G each purchased half of the Heinz common stock for $4.25 billion," Buffett wrote in the 2013 annual letter.
At the time, Buffett acknowledged that the deal resembled a private equity transaction, but that Berkshire "never intends to sell a share of the company."
"What we would like, rather, is to buy more, and that could happen," he wrote at the time.
In 2015, Heinz merged with Kraft. Prior to that deal, Berkshire owned about 53% of Heinz at the cost of $4.25 billion. After the merger, Berkshire owned 325.4 million shares of Kraft Heinz that cost about $9.8 billion.