Is This Warren Buffett’s Worst Investment?

By Glenn Dyer | More Articles by Glenn Dyer

Warren Buffett’s problems with Berkshire Hathaway’s loss-making investment in ailing food giant, Kraft Heinz, shows no sign of improving.

In fact, the problems are worsening for the legendary investor, further underlining his admission earlier this year that he paid too much for his stake in Kraft Heinz when helping finance the takeover and that produced the now crippled giant.

“I made a mistake in the Kraft purchase in terms of paying too much,” Buffett told CNBC in June when discussing the deal and Berkshire’s 26% stake in Kraft Heinz.

Buffett and Berkshire are now down around $US5 billion in value on Kraft Heinz from the start of the year.

That observation was further underlined last week when Kraft Heinz shares shed another 17.7% in value to be down more than 50% in the past year.

That means more paper losses for Berkshire after Kraft Heinz revealed write-downs of its own totalling $US15.4 billion in February. The shares fell 27% on the day that the shock announcement was made.

Last week the company released its June 30 figures and revealed another write-down. Revenue fell 4.8% in the half from a year ago to $US12.4 billion in the period and its operating income fell 54.6% to $US854 million from $US1.76 billion a year ago.

Analysts said there were few if any positives from the results.

It again cut its dividend to 40 US cents a share from 62.5 US cents a share. This sized cut followed similar cuts for the 4th quarter of 2018 and the March quarter of this year.

Kraft-Heinz wrote down the value of its Eastern emerging markets, Brazil, United States Refrigerated, and Latin America Exports by about $US744 million.

It also wrote down the value of certain intangible assets” by $US474 million “to reflect the markets’ perceived risk in the company’s valuation,” according to the statement.

And for the second quarter in a row, the company will not meet the deadline for filing its 10-Q statement with the Securities and Exchange Commission. That filing contains detailed financial and other data on a company’s performance and a discussion of current and future risks. It is the second quarter in a row that this filing will have been delayed.

Berkshire Hathaway said in its August 3 quarterly statement that its results did not include any equity-accounted contribution from Kraft Heinz.

But in that earnings release, Berkshire did note that it had “evaluated our investment in Kraft Heinz for impairment as of June 30, 2019.”

“Based on the available facts and information, the length of time that fair value was less than carrying value and our ability and intent to hold the investment until recovery, we concluded that recognition of an impairment loss in earnings at June 30, 2019, was not required.”

Analysts say the loss, profit slide, lower revenue and weak outlook from Kraft Heinz should force Buffett to take another view at cutting the carrying value of Kraft Heinz in Berkshire’s books.

Berkshire Hathaway owns more than 325 million shares of Kraft Heinz, some 26.7% of the company. The value of the holding has dropped to about $US9.19 billion from just over $US14 billion since the start of the year, creating a roughly 34% loss for Berkshire Hathaway.

Kraft Heinz was the sixth-largest holding in Berkshire’s portfolio as of the end of 2018. Berkshire Hathaway and 3G Capital bought Heinz in 2013 for $US23 billion and merged the company with Kraft two years later.

Berkshire also said in its June quarter results that adjust its earnings and market values once Kraft Heinz had released its quarterly results.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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