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Warren Buffett's Kraft Heinz investment might still be in the money

Julia La Roche
Reporter

Legendary investor Warren Buffett, the founder of investment behemoth Berkshire Hathaway ( BRK-A , BRK-B ), took a big hit on Kraft Heinz ( KHC ) stock. But he may still be in the money on the investment.

On Thursday, Kraft Heinz missed analysts' forecasts for its most recent quarter, posting a surprise net loss. The packaged food company that makes products such as ketchup and macaroni and cheese also delivered weak guidance; disclosed a massive $15.4 billion non-cash impairment charge mostly tied to Kraft and Oscar Mayer brands; revealed it received an SEC subpoena related to its accounting practices; and announced a dividend cut.

Shares of Kraft Heinz fell nearly 27.5% on Friday, falling $13.23, to end the week at $34.95 per share, an all-time low.

Buffett’s Berkshire Hathaway owns nearly 27% of Kraft Heinz common shares, a stake of 325.6 million shares.

In his widely-read annual letter released on Saturday, Buffett said Berkshire took “a $3.0 billion non-cash loss from an impairment of intangible assets (arising almost entirely from our equity interest in Kraft Heinz).”

Buffett didn’t delve into much detail on the Kraft Heinz investment other than noting at the end of 2018, the holding “had a market value of $14 billion and a cost basis of $9.8 billion.”

Bottles of Heinz tomato ketchup bear a special Berkshire Hathaway label as they are offered for sale to shareholders on the exhibit floor at the CenturyLink Center in Omaha, Neb., Friday, May 4, 2018. (AP Photo/Nati Harnik)

Assuming the position hasn’t changed, it’s possible Buffett is still in the money today. According to our calculations, the Kraft Heinz stake is currently valued at $11.38 billion based on Friday’s closing price, about $1.58 billion above Buffett’s cost basis for the shares.

Buffett said his Heinz bet was alike a private equity transaction

Buffett's investment in Kraft Heinz dates back to 2013 when 3G Capital, a firm led by Buffett's friend Jorge Paulo Lemann and associates Alex Behring and Bernardo Hees, asked Berkshire to team up as a financing partner to buy a majority interest in Heinz.

"In that role, we purchased $8 billion of Heinz preferred stock that carries a 9% coupon but also possesses other features that should increase the preferred’s annual return to 12% or so. Berkshire and 3G each purchased half of the Heinz common stock for $4.25 billion," Buffett wrote in the 2013 annual letter .

At the time, Buffett acknowledged that the deal resembled a private equity transaction, but that Berkshire "never intends to sell a share of the company."

"What we would like, rather, is to buy more, and that could happen," he wrote at the time.

In 2015, Heinz merged with Kraft. Prior to that deal, Berkshire owned about 53% of Heinz at the cost of $4.25 billion. After the merger, Berkshire owned 325.4 million shares of Kraft Heinz that cost about $9.8 billion.

"The new company has annual sales of $27 billion and can supply you Heinz ketchup or mustard to go with your Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite meal," Buffett wrote in the 2015 annual shareholder letter .

Perhaps there’s an opportunity for the Oracle of Omaha to snap up some more shares.

That said, there’s been a great deal of focus on Berkshire Hathaway’s equity investments, especially given some of the recent market volatility that’s caused some investments, like Apple ( AAPL ), to drop in value.

In the letter, Buffett acknowledged that there will be "wide swings" in Berkshire's quarterly GAAP earnings, largely because of their nearly $173 billion stock portfolio that's prone to sizable one-day fluctuations. (Kraft Heinz is excluded from that portfolio because Berkshire is part of the control group and has to account for this investment on the “equity” method.)

The new GAAP accounting rule requires that this mark-to-market change be included in the bottomline, which is problematic given the volatility resulting in "profit" or "loss" swings anywhere from $2 to $4 billion in a matter of days.

"Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety. My saying that in no way diminishes the importance of our investments to Berkshire. Over time, Charlie [Munger] and I expect them to deliver substantial gains, albeit with highly irregular timing."


Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter .