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.