Why Buffett’s not sweet on Mondelez
Host of reasons seen for staying on sidelines
Warren Buffett’s love for all things sweet is no secret. Dating back to Berkshire Hathaway Inc.’s purchase of California-based See’s Candy Shops in 1972, the subsequent acquisition of popular ice cream chain Dairy Queen, and his more than nine per cent stake in CocaCola Co., the billionaire investor has demonstrated that treats provide him with both personal satisfaction, and the requisite revenue generation for his portfolio.
The Omaha- based conglomerate’s biggest holding also happens to be Kraft Heinz Co. (it controls more than 25 per cent of the company), which owns brands such as Kool- Aid, Jell- O and many others.
So when Buffett said “no” after being asked recently whether the ketchup and mac ’ n cheese maker was interested in buying Mondelez International Inc., it prompted more than a little surprise. After all, Buffett owned Kraft when it included most of today’s Mondelez, whose brands include Oreo, Cadbury, Toblerone and Peek Freans. Mondelez was later spun off as a separate snack food company.
Buffett also teamed up with 3G Capital f or t he mega- merger of Heinz and Kraft.
David Palmer, an analyst at RBC Capital Markets, admitted he was pretty confused by Buffett’s response.
“… The more we looked at the possibilities, the more it seemed that Mondelez should have been atop the target list for Kraft Heinz,” Palmer said.
There is some precedent for Buffett opting not to endorse such a deal, as he publicly opposed Kraft’s acquisition of Cadbury in 2010. But Wall Street has singled out Mondelez as a likely acquisition for Kraft Heinz, after the latter’s hostile US$ 143 billion takeover attempt for Unilever Plc failed.
Buffett seems to think adding Mondelez won’t give Kraft Heinz more l everage with retailers, many of which are facing the increased competition from Amazon. com Inc. and its Whole Foods Market grocery business.
If he’s right that brand strength is more important to retailers than the size and scale of the company selling that brand, then a deal for Mondelez doesn’t make as much sense.
But RBC’s Palmer thinks t his sort of acquisition would be different for Kraft Heinz. For one, Buffett is investing in an aggressive “Outsider” management team at Kraft Heinz.
In t he packaged f ood world, t hat category i ncludes senior executives focused on independent thinking, capital allocation, patience with acquisitions, and decentralized organizational structures among other similar traits.
“Thus, we believe today’s Kraft Heinz is more of an advantaged acquirer than the prior Kraft,” Palmer said.
The analyst also thinks Buffett has less of a conflict of interest in the chocolate world, now that the Mars family bought back his US$2 billion stake in the candy bar maker in l ate 2016. Palmer believes that should pave the way for Kraft Heinz to purchase Mondelez.
So what’s holding Buffett back?
His biggest concern — and one that seems to be dominating the U. S. food sector today — might be Amazon. As the online retail giant increases its commitment to food, both through Whole Foods and its own distribution channels, investors and retailers alike see the game changing dramatically.
But while Amazon’s pursuits may hurt many convenient meal and snack categories, Palmer doesn’t think Mondelez’ offerings will suffer nearly as much.
The analyst noted that Mondelez’s exposure to the U. S. market is only about 15 per cent, and its biscuit and gum business offer compelling synergies with Kraft Heinz.
Mondelez is also the biggest chocolate player outside the U. S., and has meaningful exposure to emerging markets — two areas Buffett has highlighted as growth opportunities in the past.
So while Mondelez has an impressive collection of some of the world’s largest sweet snack brands, the market should assume Buffett is an accurate messenger for Heinz Kraft’s intentions.
There may be a disagreement on the takeover price or potential synergies, along with a host of other possible hang- ups. Palmer believes those most likely include worries about earnings power due to competition, free cash flow, category exposure and geographic mix, and even the opportunity for greater synergies in the home and personal care sector.
Mondelez has also had to deal with activist investors such as Pershing Square’s Bill Ackman and Trian Partners’ Nelson Pelz.
So for now the answer is no. But investors know that really means “not now,” because as Palmer pointed out, the U. S. food sector is getting cheaper and cheaper as the impact of Amazon’s efforts reverberate across markets. That might soon make Mondelez too attractive for Heinz Kraft to pass up.
SHOULD HAVE BEEN ATOP TARGET LIST FOR KRAFT HEINZ.