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.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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!