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.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!