Surprising Concern About Berkshire’s H.J. Heinz Company (HNZ) Deal

I’m guessing that Berkshire has tried to reduce its risk with a buyback provision included with the preferred. However, that infers Heinz will be able to refinance the $8 billion in a timely manner when, as I expect, the company will also be undertaking a substantial restructuring under 3G Capital’s guidance. Given the history of 1980′s consumer product leveraged buyouts like RJR Nabisco and Beatrice Foods, it is hard to deny that deals comprised of a generous offer, meaningful leverage and a restructuring involve a significant amount of risk.

Berkshire’s increased partiality toward “sweetheart” preferred stock deals is also concerning. Besides the Heinz preferred, Berkshire has purchased $5 billion of Bank of America 6% preferreds that also included 700 million shares worth of around par warrants in 2011. In 2008, $3 billion in General Electric 10% preferred shares were purchased that included a 10% buyout premium. These were later redeemed in 2011. Berkshire also undertook attractive preferred share deals with Goldman Sachs 10% paper (that was also redeemed in 2011) and $3 billion of Dow Chemical 8.5% stock.

These purchases are not necessarily a negative in themselves. But in assessing Berkshire’s future operations their continued availability cannot be counted on without a concurrent assumption that these deals will also involve increased risk. I think the Heinz transaction is an example.

However, Berkshire being un-investable is not related to these factors specifically but more to their influence on calculating the company’s “discount factor.” Conglomerates, of which Berkshire Hathaway may be the most varied ever, usually have their intrinsic business value discounted. This discount is justified by the additional administrative control necessary to oversee the disparate businesses held. The potential for further acquisitions to spur growth and the possible internal unease at future divestitures of lagging subsidiaries are additional concerns that usually warrant a discount.

As Berkshire brought some large dissimilar businesses into its fold, such as the BNSF railroad and chemical company Lubrizol, the discount factor appraisal was made more difficult but not unmanageable. Though, as the Heinz deal might suggest, if Berkshire is pushing out on the risk spectrum and relying more on unconventional preferred share deals, ascertaining a reasonable discount is getting close to being impossible. Without being able to discount Berkshire intrinsic value adequately, its stock is just about uninvestable.

I’m sure investors will flock to Berkshire Hathaway for a variety of reasons but the Heinz deal might make the stock far less attractive. Shareholders and potential stock buyers might want to consider my concern and satisfy for themselves that they are truly getting the value they believe they are paying for.

The article Surprising Concern About Berkshire’s Heinz Deal originally appeared on Fool.com and is written by Bob Chandler.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Click here to Read Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 74 percentage points in 2.5 years. Our beta is only 1.2 (download a FREE newsletter and see the details inside)

Lists

Best Selling Magazines in the World

Shortest People in History

The Most Celebrated Holidays in the World

Most Expensive Handbag Brands in the World

Top Selling Comic Book Issues of this Century

The Most Powerful Women in Politics

Best Paid DJs

Most Rebellious Female Artists

Best Paid TV Actresses of 2014

Best Paid Actors of 2014

Most Expensive Horses in the World

Tallest People Ever

Most Encouraging Feminist Celebrities

Best Paid Supermodels of 2014

Top 10 Suburbs for Retirement in 2015

10 Wealthiest Cities in America

Top 10 TED Talks for Entrepreneurs

Best TED Talks on Education

25 Most Dangerous Places to Live in America

Top 10 Ski Resorts in the United States – 2014 List

Top 10 Most Remote Places in the World

Most Visited Museums in the United States

Wealthiest Photographers in the World

Most Famous Gay Athletes

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!