warren-buffet

Buffett Buying Heinz – Not As Expensive as Appears

in FP: Latest/Stock Analysis by

Berkshire Hathaway buying Heinz is unlike any deal Buffett has ever done.  In his past deals he was always a passive owner – he let existing management continue to run the company.  In this case 3G, a private equity firm that has done terrific turnarounds in the past, will be the new management.  They are putting in $1 billion of capital for half of ownership, but also a lot of sweat capital.  On the surface Buffett is paying 20 times earnings, a fairly high multiple even for this high-quality business, but 3G involvement will likely elevate the earnings power of Heinz significantly over time.  So this is a classic Buffett deal in one respect: Buffett is saying, I’m willing to pay a premium for a quality business that has long-term pricing power. (Heinz scores great on both counts).  Buffett is willing to pay a premium for it, but this time the premium is less than it appears on the surface.

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Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley) and The Little Book of Sideways Markets (Wiley). His books were translated into eight languages. Forbes Magazine called him "The new Benjamin Graham".

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