Warren Buffett's biggest problem is well known to investors and the market. The billionaire founder and CEO of Berkshire Hathaway has too much cash and not enough reasonable valuations in corporations to make major acquisitions. In 2013, Buffett found a target that he had kept a file on going back to the 1980s, and one that fit the mold of the companies that Berkshire aspires to bring under its conglomerate umbrella — a cash-rich, strong global consumer brand: Kraft Heinz.
But Buffett couldn't buy the company outright because the deal was brought to him by another company. He didn't continue to buy shares of the stock on the open market as he does with many stocks he likes. Instead, Buffett teamed up with Brazilian private equity giant 3G Capital to acquire Kraft Heinz. It was a new path for Berkshire Hathaway in dealmaking, and it immediately led to questions for an investor who had long criticized private equity's role in the market. After the Kraft Heinz stock implosion that cost Buffett a paper loss of over $4 billion in Kraft Heinz shares on Friday, Buffett may face many more questions about whether Berkshire should ever repeat the 3G approach.
The criticisms were obvious: 3G Capital is known for ruthless cost-cutting rather than the kind of long-term investment with a holding time of "forever" that Buffett espouses. But Buffett insisted that, this time, it was different. Buffett said the deal, unlike many PE deals, represented buyers investing for the long-term. "This is my kind of deal and my kind of partner," he told CNBC at the time. He called Kraft Heinz "3G's baby."
There were skeptics in the market when the deal was announced. Robert Dickerson, at that time a food analyst at Consumer Edge Research and now at Deutsche Bank, asked: "If they were well-positioned, why are they financial buyers, not strategic buyers."
There were warning signs that tensions between Buffett's typical approach to acquisitions, a hands-off ownership that invests in — and sometimes because of current management — wouldn't be the case with 3G in control. Heinz CEO Bill Johnson said at the deal press conference in 2013 that he was "way too young" to retire. In less than a year, he was replaced by a 3G officer, current Kraft Heinz CEO Bernardo Hees.
Pressed about the PE firm's involvement on CNBC back in 2013, Buffett insisted, "It is a partnership. It's a permanent partnership. We will not sell our interest, so it has no connection with the private equity people that essentially buy and then resell businesses."
Last August, 3G Capital sold 7 percent of its stake in Kraft. At that time, 3G founder Jorge Lemann said the business model of buying strong consumer brands is facing new difficulties from upstarts. And Lemann used Buffett's favorite word about the right holding time for a stock in a way that was very un-Buffett. "We bought brands that we thought could last forever," he said at the Milken Institute Global Conference. "You could just focus on being very efficient. ... All of a sudden we are being disrupted."