You Can’t Match Warren Buffett’s Deals: Bank of America Corp (BAC), General Electric Company (GE)

If you want to be a smart investor, you can learn a lot from Warren Buffett. Just don’t expect to be able to make the same investments, because many of his biggest successes have involved deals with terms you simply can’t get on your own.

The latest milestone
Yesterday, investors in Berkshire Hathaway Inc. (NYSE:BRK.A) celebrated another milestone, as its B shares traded above the $100-per-share level for the first time. Although plenty of factors have contributed to Berkshire’s gains in recent months, the crowning achievement was the company’s deal with private-equity firm 3G Capital to buy H.J. Heinz Company (NYSE:HNZ) for $28 billion in cash and debt.

Although details of the Heinz deal were somewhat sketchy at first, leading some to wonder whether Berkshire had overpaid for the ketchup king, later revelations about the terms of the deal have shown that Buffett managed to structure Berkshire’s investment in Heinz in a way that makes it look a lot more attractive to Berkshire shareholders.

Buffett and his preferred deals
In recent years, Buffett has singlehandedly raised the awareness level among investors of the virtues of preferred stock. In the Heinz deal, Berkshire will invest $12 billion, with $8 billion of that going toward preferred shares that will yield 9% annually. The remaining $4 billion will go toward a traditional equity stake in the company, with 3G Capital putting up an equal $4 billion for a 50/50 split of the company’s common stock.

Even if you consider the preferred by itself, its terms are sufficiently attractive to satisfy most income investors. With the preferred subject to redemption at either party’s request under certain circumstances, it appears that both parties have some liquidity in dealing with the preferred. Moreover, in today’s low-interest-rate environment, 9% is a pretty high rate, even despite the fact that Fitch Ratings cut its bond rating on Heinz from BBB+ to BB+ after the deal was announced, sinking the food company to junk status.

Set your watch and warrant on it
But the true value of Buffett’s dealmaking is that he always seems to get an equity kicker that has huge potential for further gains. The SEC filing that discusses the acquisition doesn’t go into a huge amount of detail on the transaction, but it does say that the $12.12 billion investment package includes “preferred and common stock and warrants” [emphasis added] of the post-merger Heinz.