Warren Buffett's Kraft Heinz deal was unlike any Berkshire has done. He may not want to repeat it.

Key Points
  • Warren Buffett's relationship with Brazilian private-equity giant Jorge Lemann of 3G Capital led to the 2013 acquisition of Kraft Heinz.
  • Buffett insisted the deal with the private-equity firm was unlike the kind of PE deals he had long criticized.
  • Berkshire Hathaway has a huge cash balance and has found it more difficult in recent years to make major acquisitions. The 3G deal was a new M&A path, but now that path looks questionable.
Heinz ketchup bottles on display at the 2018 Berkshire Hathaway Annual Shareholder's Meeting.
David A. Grogan | CNBC

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."

A larger Kraft Heinz may not be welcome in the market, says analyst
A larger Kraft Heinz may not be welcome in the market, says analyst

There is one simple explanation for what went wrong that doesn't require looking for tensions between Buffett's philosophy and 3G Capital: the buyers simply overpaid and underestimated the rapid shift in consumer food preferences.

Buffett once helped finance a successful food industry deal, involving two brands he long admired, Mars and Wrigley, but that was back in 2008 and it brought together two strategically aligned food companies rather than bringing in a private equity team to take over management. Buffett has said more recently that paying a premium for a packaged food company is tough, and said in his annual letter on Saturday that throughout the market prices are "sky-high" making large acquisitions difficult — Buffett said he expects to be buying more individual stocks than whole companies in 2019.

Some on Wall Street say the major Kraft Heinz brands — which were subject to a surprise $15 billion in writedowns in value on Thursday — have suffered as a result of 3G's focus on cost cutting over investment. Kraft Heinz's 3G team also has less experience in the food industry, and analysts and investors say 3G's model depends on dealmaking. That was a place where more tensions would emerge between 3G and the "Buffett way."

Kraft Heinz attempted to acquire Unilever in 2017 for $143 billion in 2017, a proposal that Unilever deemed hostile, making it not the kind of M&A Buffett likes to make — he has always been opposed to hostile takeovers. Buffett told CNBC at that time the bid for Unilever was not intended as a "hostile offer," but "it may have been interpreted that way."

When Buffett decided to leave the Kraft Heinz board of directors last year — he said because it required a type of travel he no longer liked to do and it was the last board he remained on — other speculated that taking Buffett off the board would remove the "hostile" takeover issue for 3G.

One thing has not changed: Buffett needs more ways to spend Berkshire's cash, and the atypical 3G deal looked like it could serve as a model for the future, possibly beyond Buffett's tenure, to scout acquisitions globally. Aside from financial crisis deals borne by unique circumstances, being neither a sole strategic acquirer or a passive stockholder isn't the way Buffett has worked historically.

In a light Corner Office column interview with the New York Times last May, Kraft Heinz CEO Hees said "new mistakes are welcome."

As Berkshire continues to look for new ways to deploy cash — which now stands at roughly $100 billion — it may want to think twice about going down the PE deal path in the future, even if Buffett insists it isn't PE.

CNBC's Lauren Hirsch contributed to this article.

Subscribe to CNBC on YouTube.