Why Warren Buffett Loves Ketchup, Plain and Simple

Warren Buffett's $28 billion purchase of Heinz makes sense if you examine his investing habits

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Scott Eells / Bloomberg / Getty Images

Warren Buffett speaks during an interview on the sidelines of the Allen & Co. media-and-technology conference in Sun Valley, Idaho, on July 13, 2012

For many Americans, Warren Buffett isn’t just one of the world’s greatest investors. He’s a folksy grandpa with a mysterious wizard’s touch. Everything about him — his upbringing, employees, travels, personal life, investing style, even his home decor — has been picked over for insights about what exactly goes into his pixie dust. (There have been two dozen books published on him in the past year alone, according to the Financial Times).

Naturally, his $28 billion purchase of H.J. Heinz with U.S.-Brazilian private-equity group 3G Capital (owner of Burger King and a piece of Anheuser-Busch InBev) on Feb. 14 caused a lot of chatter. But the move is no mystery; it’s classic Buffett, and here’s why.

Buffett lauded Heinz for good management and for making “great-tasting products.” No surprise that the “Sage of Omaha” is a big burger eater. But that’s hardly enough to sway Buffett the number cruncher. As market watchers know, he’s considered a value investor — someone who buys companies when they’re cheap — which is a strategy he learned from his Columbia Business School professor Benjamin Graham, author of the geeky classic The Intelligent Investor. He’s also partial to the market’s plain vanilla: low-risk companies with rock-solid balance sheets. In this case, Heinz didn’t come cheap. Buffett’s Berkshire Hathaway and 3G paid a 20% premium for Heinz’s shares, which makes them pricier than those of most packaged-foods companies (aside from a few elite brands like Nestlé and Hershey). For Buffett, the real value of Heinz was its steady stream of cash and safe strategy.

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Why not buy into other steady goers in the food business like Kraft or ConAgra? In the world of staple products, Kraft has proved risky for Buffett’s taste. He chastised the company for buying Cadbury in 2010. To free up cash for the purchase, Kraft sold its frozen-pizza business (DiGiorno, Tombstone and Jack’s) to Nestlé. Frozen pizzas were a big winner during the recession, but Kraft wanted a bigger piece of fast-growing emerging markets, where Cadbury is a big player. Kraft has since split into two separate businesses, a move that shook investors, and Buffett has sold a big chunk of his holdings.

ConAgra is another relatively risky grower. The company’s $5 billion cash purchase of private-label company Ralcorp in November is a big bet on the growth of private-label products globally (a.k.a. the generic brands you hated as a kid because real Lucky Charms are better). But a recent report by SymphonyIRI Group suggests consumers may be heading back to name brands.

Heinz has dabbled in its own riskier plays in the past — for instance, buying into pet food (9Lives and Kibbles ’n Bits) and canned tuna (StarKist), businesses it later sold to Del Monte. But recently, the iconic global brand has come back to what it does best: earning a hefty premium for mixing vinegar with tomatoes. There may be some wizardry in the Heinz recipe, but not in its corporate strategy. And that’s magic enough for a wizard with simple tastes.

26 comments
qslstan
qslstan

He has not done very much with his money, he just as he says buys others people work cheap, then lays people off. 

It would be really nice to see him build a company from scratch,  and build a real empire

joethecarver
joethecarver

Call me whatever you want, but any business owner who can close down entire towns simply for the sake of the almighty buck and sleep is completely out of touch with the people he makes such a big deal of showing us all that he thinks himself worthy to belong to and therefore he is not worth the dirt he walks on.  Warren Buffett is that individual.  Certainly, there are more people involved, but he is the grand hypocrite of that particular bunch.  Please spare me the rationalizations that supposedly make horrible dicisions like the one mentioned above valid.  See if you feel the same way when your town looses it's bread and butter industry with the stroke of a pen.  Do I judge?  You're damn right I judge when it comes down to people destroying people for the sake of greed.

Read more: Warren Buffett and Heinz: Why He Made the Investment | TIME.com http://business.time.com/2013/02/15/why-warren-buffett-loves-ketchup-plain-and-simple/#ixzz2nkthkXmu.

AndrewAndreeff
AndrewAndreeff

SEC received the urgent court order to refrigerate the account in the Swiss Bank, allegedly used for insider transactions before acquisition by the Berkshire Hathaway companies and 3G of HJ Heinz corporation Capital. Thanks to the message on the transaction of the share Heinz grew by 20 percent. And the cost of some options which were traded from this Swiss bank account, rose by 1700 percent. http://www.law-us.blogspot.com/

LaddieSchnaiber
LaddieSchnaiber

@TIME @TIMEBusiness I love ketchup too. How come I am not a billionaire?

TUSKS71
TUSKS71

@TIME @timebusiness Warren Buffet ... Be careful .. Sy Mytting Berkshire to Manulife ...robbed us blind . Manulife won't admit .

pat_vch
pat_vch

Warren Buffet chastised Kraft for buying Cadbury in 2010. Más claro no podía estar. “@TIME:| http://t.co/BClOBL9H (via @TIMEBusiness)”

igetitwrite
igetitwrite

@TIME @TIMEBusiness Thanks for sharing. I enjoyed reading this.

RajaMani
RajaMani

What about all the incoming layoffs? What about the newly bought organization, which has to carry heavier debt load. Aren't Buffet and others, not borrowing money against Heinz, to buy Heinz, and in the process, reducing intrinsic value built up over the years. The premium that was paid to the shareholders, is it not, the result of years of labour, of the very employees, whose jobs and benefits are at stake? Where is the morality here?

easyweblinx
easyweblinx

giving away 99% of his capital.............good guy!


easynewslinx.com

RuthGelman
RuthGelman

@TIME @TIMEBusiness @oreillyfactor @GOPWhip tastier than battle blood?

jlbungert
jlbungert

I already adored him, now do even more: RT“@TIME: Why Warren Buffet loves ketchup | http://t.co/Cry0hpQl (via @TIMEBusiness)” #biggestfan

robitrox
robitrox

@TIME Hence the acquisition of Heinz???

brettbeau
brettbeau

@TIME @timebusiness Warren Buffet this and Warren buffet that.

rjsigmund
rjsigmund

he overpaid john kerry by 20% for heinz; however, he'll get more than that back when kerry blocks the keystone XL, cause buffett owns most of the railroads & oil tanker rolling stock west of the mississippi...

RuthGelman
RuthGelman

@brettbeau @TIME @TIMEBusiness @marcorubio @oreillyfactor @hannityshow COOURT MARTIAL CommanderInChief?

RuthGelman
RuthGelman

@OthmaneOane @TIME @TIMEBusiness @oreillyfactor @hannityshow @marcorubio Court Martial R Commander In Chief?