Buffett Hints at More Heinz-Like Deals in Annual Letter

MARCH 1, 2014, 10:35 AM  Comment

Buffett Hints at More Heinz-Like Deals in Annual Letter


Updated, 2:49 p.m. | The challenge looming over Warren E. Buffett is whether Berkshire Hathaway, the vast business empire he has built over five decades, can continue to make the sort of large acquisitions that will help it grow at a pace that will sustain his reputation as the nation’s shrewdest investor.

But Mr. Buffett, in Berkshire’s annual report released on Saturday, highlighted the large deals that his company made last year, including the acquisition of H. J. Heinz — and strongly hinted at how future big purchases might take place.

“With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in future acquisitions of size,” Mr. Buffett said. Last year, Berkshire’s energy subsidiary, MidAmerican Energy, bought NV Energy for $5.6 billion. “NV Energy will not be MidAmerican’s last major acquisition,” he said.

Jeff Matthews, a hedge fund manager who has written books on Berkshire, said he detected a strong desire to make more acquisitions.

“I think it’s way more than a hint,” Mr. Matthews said in an email. “He clearly sees more deals at MidAmerican.”

Every year, Berkshire’s annual reports are devoured as avidly as best-selling novels. The main attraction is Mr. Buffett’s letter to shareholders, in which he often extols America as a breeding ground for rags-to-riches success and tells how he came to make certain investment decisions, using plain English and the odd dash of homespun humor along the way.

“Mrs. B was 89 at the time and worked until 103 — definitely my kind of woman,” Mr. Buffett wrote in this year’s letter, describing the now dead Rose Blumkin, whose family owned Nebraska Furniture Mart, a retailer that Berkshire bought in 1983.

The praise for working to a late age suggests that Mr. Buffett, 83, will not retire any time soon. Still, that will not have stopped Berkshire’s shareholders, and many others, from scouring the report for clues about whom Mr. Buffett has picked as his successor to run Berkshire’s operations. Two years ago, Mr. Buffett said that his successor had already been selected.

As he has done in past years, Mr. Buffett heaped praise on Ajit Jain, the head of Berkshire’s reinsurance group and the man many have speculated will take up the top post. “His operation combines capacity, speed, decisiveness and, most important, brains in a manner unique in the insurance business,” Mr. Buffett said of Mr. Jain.

A rising stock market and strong earnings from its companies helped Berkshire report record profit in 2013 of $19.5 billion, a 32 percent rise from $14.8 billion in 2012. Mr. Buffett has long used book value per share — a measure of Berkshire’s net worth belonging to shareholders — to assess the company’s performance. That rose 18.2 percent in 2013, much less than the 32.4 percent rise in the Standard & Poor’s 500-stock index.

“As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value,” Mr. Buffett said.

Even though the stock market is trading at highs, Mr. Buffett did not contend in the letter that stocks are overvalued, as he has done in past annual reports.

One way for Berkshire to grow is to make more acquisitions. But as Berkshire gets bigger, the acquisitions also must be sizable to make a noticeable difference to the company’s overall earnings.

The Heinz deal showed how Berkshire could make a substantial deal while sharing some of the financial burden with others. Berkshire bought Heinz in partnership with 3G Capital, an investment firm led by Mr. Buffett’s friend Jorge Paulo Lemann. The team-up could allow Berkshire to acquire more of Heinz.

Writing about the company, Mr. Buffett said: “Certain 3G investors may sell some or all of their shares in the future, and we might increase our ownership at such times.” Mr. Buffett, however, offered few details on how Heinz was performing, except to say its 2014 earnings would be “substantial.”

Berkshire can also grow by acquiring stakes in public companies it does not control. Its 15 largest stakes in such companies, which include Wells Fargo and Coca-Cola, are worth $98 billion.

Mr. Buffett’s annual letters are well read because they make investing seem simple, something he often tries to achieve with down-home anecdotes.

But for all his investing lessons, Mr. Buffett also suggested a very simple strategy for people who do not want to parse balance sheets. When he dies, Mr. Buffett’s cash will be put into a trust for his wife, Astrid Menks. Mr. Buffett said he had advised the trustee to put 10 percent of that cash into short-term government bonds and 90 percent into an S.&P. 500 index fund.

“I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers,” he said.

In addition to the investment victories, Mr. Buffett dwelled on an expensive failure. Berkshire, he said, had taken an $873 million loss on $2 billion of debt in Energy Future Holdings, a Texas energy company. Mr. Buffett said he expected the company to go bankrupt this year unless natural gas prices go up a lot.

He acknowledged that he did not consult his longtime investment partner, Charles T. Munger, before taking on the debt. “Next time I’ll call Charlie,” Mr. Buffett wrote in the report.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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