Saturday 19 August 2017

Buffett seen as valuable asset in Kraft-Unilever talks

Berkshire would be involved in financing if an agreement is reached, according to a person familiar with the matter, who asked not to be identified. Unilever said it rejected the $143bn (€134bn) proposal (Stock picture)
Berkshire would be involved in financing if an agreement is reached, according to a person familiar with the matter, who asked not to be identified. Unilever said it rejected the $143bn (€134bn) proposal (Stock picture)

Sonali Basak and Craig Giammona

Warren Buffett's ability to provide billions of dollars and his willingness to defend job cuts are seen as valuable assets for the buyout firm 3G Capital as it seeks to combine Kraft Heinz and Unilever.

Buffett backed 3G's acquisition of HJ Heinz and then the ketchup maker's tie-up with Kraft. Now the combined company, which counts Buffett as a director, has added to its ambitions, announcing on Friday that it made an offer for the maker of Dove soap. Berkshire would be involved in financing if an agreement is reached, according to a person familiar with the matter, who asked not to be identified. Unilever said it rejected the $143bn (€134bn) proposal.

Buffett's Berkshire Hathaway has made billions of dollars by financing deals through debt or preferred-stock purchases, and if the consumer giants reach an accord, "It seems very plausible that they would participate in the funding," said Meyer Shields, an analyst at Keefe Bruyette & Woods. "I'd be shocked if not."

Berkshire had a cash pile of more than $80bn (€75.4bn) as of September 30, and the hoard has been growing because Buffett hasn't announced a mega-deal since the 2015 agreement to buy Precision Castparts. Also, some lucrative financing deals have expired, including the decision last year by Kraft Heinz to redeem $8bn (€7.5bn) in preferred shares that were held by Buffett. Berkshire was paid 9pc a year on that holding.

Though Buffett has said his favoured path for building Berkshire is through acquisitions, the company has been more active in recent months buying stock in public markets, building stakes in US airlines and Apple. Given the premium that is required to buy out a whole company, it may make more sense at current market valuations for Buffett to lock in a fixed rate of return in a financing deal, Shields said.

Buffett, who is Berkshire's chairman and chief executive officer, sometimes gets warrants on such transactions, too. This allowed Berkshire to buy shares at a discounted price in 3G-backed Restaurant Brands International, the parent of Burger King and Tim Hortons. Buffett didn't return a call seeking comment.

"It's safe to say that with Buffett they can overcome any financial hurdles to get the deal done," said Ken Shea, an analyst at Bloomberg Intelligence. "It's a good partnership - 3G is the operator and Berkshire is the banker."

The public support that Buffett provides can be valuable too, especially since 3G's approach typically involves slashing thousands of jobs, a strategy that can draw public ire in an era of populism that helped propel Donald Trump to the White House.

Buffett has said that 3G is fair with severance payments, and that it makes no sense for companies to employ more people than they need. "Efficiency is required over time in capitalism," Buffett said at Berkshire's annual meeting in 2015. "I really tip my hat to what the 3G people have done."

The billionaire is among the most popular figures in American business because of his homespun wisdom, wit and charitable giving. He has further emphasized the point on efficiency in his letters.

Buffett's remarks are "another way of saying 'expense reductions,"' Shields said. "And that's another way of saying 'firing people."'

(Bloomberg)

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