The Warren Buffett Way
Buffett's Investments: H.J. Heinz Company
Heinz is a stereotypical Buffett style company and can be compared with Coca-Cola. It is even older than Coca-Cola (started some 18 years before Coca-Cola). The company is heavily focused on growing its business in the emerging markets.
Consistent operating history
As stated earlier, Heinz is a company that came into existence even before Coca-Cola in 1869. Therefore, the company has a centuries old operating history.
Favorable long-term prospectus
Since Heinz is focused on emerging markets, it accounts for 80% of the growth in the company's revenues. Therefore, the company has good long-term prospects.
Buffett purchased Hienz in partnership with 3G Capital. Heinz was burdened with debt and had a debt to equity ratio of 6:1. Therefore, what Buffett did was he invested $4 billion in equity for 50% stake and $8 billion in redeemable preference shares yielding 9%. The preference shares were a master stroke.
- These could be redeemed at a significant premium to the cost price in the future
- It also had attached warrants (similar to options) which will allow Buffett to purchase 5% of the company at a nominal price.
With this deal, Buffett will earn a 6% blended rate of return on his total investment. Even if Heinz loses money, Berkshire (i.e. Buffet) will not lose money.
So, what is the common theme in stock investing by Buffett?
- Buffett is in no hurry to sell his stake in the company.
- Short term price appreciation doesn’t interest him.
- Buffett is ready to hold a business as long as the return on capital is satisfactory, management is competent and honest and the market does not overvalue the business.
- Buffett's favorite holding period is “forever”.