Heinz becomes perfect side to Buffett's deals

OMAHA, Neb. (AP) -- Billionaire Warren Buffett remains happiest while hunting for deals like Thursday's $23.3 billion acquisition of the maker of Heinz ketchup his Berkshire Hathaway Inc. is helping finance.

So Berkshire shareholders can set aside the idea that the 82-year-old Buffett might retire someday even if he did undergo prostate cancer treatment last summer.

Buffett enjoys what he does as Berkshire's chairman and CEO far too much.

And he keeps looking for lucrative ways to use the $47 billion cash that Berkshire had on hand at the end of the year. Buffett Biographer Andy Kilpatrick said his fellow shareholders can take comfort in the Heinz deal.

"I think it's another sign that 'I'm still here, guys,' " said Kilpatrick, who wrote "Of Permanent Value: The Story of Warren Buffett."

If Berkshire were buying H.J. Heinz Co. company outright, the deal would be Buffett's second-biggest ever behind the $26.3 billion purchase of BNSF railroad in 2010.

In the Heinz deal, Buffett told CNBC that Berkshire is putting up $12 billion to $13 billion in exchange for half the company and $8 billion in preferred stock that will pay 9 percent a year. The investment firm 3G Capital is putting up the rest of the money and will run Heinz.

The price tag of the Heinz deal makes it the biggest food company acquisition ever. But Buffett has always been willing to bet big on his favorite investment ideas because he's confident in his analysis of it.

The Heinz acquisition won't even use up Berkshire's current pile of cash, so Buffett emphasized to CNBC that he is still hunting for elephants.

It never hurts when a deal involves a product Buffett enjoys himself, and Heinz ketchup fits nicely with one of his favorite meals of a cheeseburger and Cherry Coke, which is one of Berkshire's biggest stock investments.

But there's more to it than that.

Buffett spends hours each day reading reports and researching companies, industries, the economy and the performance of the more than 80 companies Berkshire owns outright.

That homework, combined with Buffett's encyclopedic memory, helps him prepare for nearly any possible deal. So when an opportunity presents itself, Buffett usually has an idea of how much he'd pay for a company long before he gets a chance to buy it.

Buffett's price is almost always less than the seller wants, but Buffett tries to buy companies for less than they're worth and he promises to hold on to acquisitions forever, if possible.

Buffett told CNBC Thursday that he already had a file on Heinz dating back to 1980 when a friend of his at 3G Capital mentioned the deal to him on a plane they shared in December.

Berkshire's Class A shares gained $1,553, or about 1 percent, Thursday to trade for $149,303. The shares set a new 52-week high when they reached $149,804 earlier in the day.

Berkshire's Class A stock remains below its all-time high of $151,650, reached in December 2007. But that came before the financial turmoil of 2008 and just after an exceptionally profitable quarter that was helped by a $2 billion investment gain.

But Berkshire has delivered a compounded annual gain of nearly 20 percent to investors since 1965. When Buffett's investment partnership first bought stock in the Berkshire textile company in 1962, the shares sold for $7 and $8 apiece.

Jeff Matthews, who wrote "Warren Buffett's Successor: Who It Is and Why It Matters," said he thinks Heinz is a great fit at Berkshire because Buffett always wants companies with enduring competitive advantages.

"I think it makes a ton of sense," Matthews said.

But unlike Berkshire's BNSF acquisition or its Geico or MidAmerican Energy deals, Berkshire is not acquiring Heinz outright. This deal will give Berkshire only half of Heinz.

Stifel Nicolaus analyst Meyer Shields said the deal's structure looks more like Berkshire helping finance 3G Capital's acquisition of Heinz rather than Berkshire acquiring the company itself. But he said the preferred stock ensures that Berkshire will profit from the deal.

Shields said this deal appears more like the ones Buffett was doing during the financial crisis by using Berkshire's cash to help finance other deals.

For instance, Berkshire helped finance Mars Inc.'s acquisition of Wrigley. Berkshire received a $2.1 billion minority equity interest in the Wrigley subsidiary and took on $4.4 billion of subordinated debt as part of the deal.

Berkshire spent $3 billion of its cash to help Dow Chemical acquire rival chemical company Rohm & Haas.

Berkshire also invested $5 billion in Goldman Sachs and $3 billion in General Electric in 2008 and received a 10 percent annual dividend until both companies repaid the investment.

Berkshire shareholders will be glad to see Buffett making big deals and not sorting out messy personnel problems like the 2011 resignation of top executive David Sokol.

Sokol, who many thought might succeed Buffett one day, resigned after a questionable investment he made in the Lubrizol chemical company Berkshire was considering acquiring.

Buffett has said that he remains in good health and his doctors never considered the prostate cancer life-threatening because it was caught early. So Heinz isn't likely to be the last condiment Buffett adds to Berkshire's investment meal.

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Follow Josh Funk online at www.twitter.com/funkwrite

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