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(Reuters) – Warren Buffett said on Monday that his Berkshire Hathaway Inc overpaid in the 2015 merger that created Kraft Heinz Co, but he had no plans to flee the struggling packaged foods company.
FILE PHOTO: Warren Buffett, CEO of Berkshire Hathaway Inc, pauses while playing bridge as part of the company annual meeting weekend in Omaha, Nebraska U.S. May 6, 2018. REUTERS/Rick Wilking/File Photo
Buffett spoke four days after Kraft Heinz said it had taken a $15.4 billion writedown for its Kraft and Oscar Mayer brands and other assets, slashed its dividend, and that the U.S. Securities and Exchange Commission was probing its accounting.
Kraft Heinz’s share price sank 27.5 percent on Friday, causing Berkshire to lose $4.3 billion on its stake. Berkshire owns 26.7 percent of Kraft Heinz. Shares rose 0.7 percent to $35.21 in early trade on Monday.
“I was wrong in a couple of ways on Kraft Heinz,” Buffett said on CNBC television. “We overpaid for Kraft.”
The comments were a rare admission of error by the 88-year-old billionaire on a major investment at his Omaha, Nebraska-based conglomerate.
Berkshire and Brazilian firm 3G Capital had teamed up in 2015 to combine the former Kraft Foods with their H.J. Heinz, and together own about half of the merged company.
Buffett also said he has “absolutely no intention” of adding to or subtracting from Berkshire’s stake, and that he would continue to do business with 3G and its co-founder Jorge Paulo Lemann, calling him “an absolutely outstanding human being.”
‘TOE TO TOE’
Kraft Heinz’s disclosure raised questions about 3G’s financial strategy for the company, whose brands include Jell-O, Kool-Aid and Philadelphia cream cheese, and whether it is out of step with consumers seeking healthier, fresher alternatives to processed food.
Buffett acknowledged the changes, but said greater pressure is coming from retailers such as Amazon.com Inc, Walmart Inc and Costco Wholesale Corp, including through the latter’s Kirkland brand.
Stronger brands can “go toe to toe with Walmart or Costco” but weaker brands “tend to lose out,” Buffett said. “The ability to price has changed, and that’s huge.”
Berkshire’s own $3 billion writedown related to Kraft Heinz contributed to a $25.39 billion fourth-quarter net loss for Omaha, Nebraska-based Berkshire.
“He monumentally overpaid for Kraft,” said Doug Kass, founder of the hedge fund Seabreeze Partners Management Inc. “Increasingly, the moats he initially saw in his investments have been damaged.”
Buffett said he learned about the SEC probe about seven to 10 days before it was announced.
Greg Abel, a Berkshire vice chairman widely considered a candidate to succeed Buffett as Berkshire’s chief executive officer, sits on Kraft Heinz’s board.
The announcement also called into question 3G’s signature business model of zero-based budgeting, which requires managers to justify their expenses annually from scratch, rather than use last year as a guide or pursue cost savings on an ongoing basis.
Kraft Heinz’s belt-tightening resulted in more than $1.7 billion in annual savings, including the loss of thousands of jobs, mirroring 3G’s similar efforts at such companies as Anheuser-Busch InBev and Tim Hortons.
While the strategy has resulted in leaner companies, it could backfire if the companies lacked products that people want, or failed to spend enough to develop and market those products.
Buffett said he did not believe 3G underinvested in Kraft Heinz. Berkshire is not involved in day-to-day operations.
Reporting by Jonathan Stempel and Jennifer Ablan in New York; Editing by David Goodman and Jeffrey Benkoe
Members of the Organization of the Petroleum Exporting Countries together with non-OPEC producers such as Russia have agreed to cut production by 1.2 million barrels per day this year to help balance the market and support prices.
The oil price has risen by around 20 percent this year, aided primarily by OPEC’s production cuts, as well as U.S. sanctions on exports of crude from Iran and Venezuela.
Trump has frequently blamed high oil prices on OPEC while the United States has become the world’s largest supplier thanks to shale output.
Monday’s comment, one of a series of tweets or comments he has made regarding oil prices since April 2018, follows a rally in crude prices in recent weeks supported by a tighter supply outlook although they are still significantly lower than the peak of more than $85 a barrel hit last October.
Trump’s comment came a day after he said that there could be “very big news over the next week or two” in trade talks between the United States and China. Concerns of global trade wars weighed on oil prices earlier this year.
Adding to the uncertain supply picture are Libya, where production has been frequently undermined by political tensions and violence, and Nigeria, Africa’s largest oil exporter, where as many as 39 people were killed in election violence over the weekend.
“Supply risk is ever present with Venezuelan tensions brewing a notch higher … the National Oil Corporation in Libya refusing to start production at the El Sharara field,” Harry Tchilinguirian, global oil strategist at BNP Paribas in London, told the Reuters Global Oil Forum.
Goldman Sachs analysts said on Monday that “the near-term outlook for oil is modestly bullish over the next two to three months”, but added that the outlook for later in 2019 was weaker due to surging U.S. exports and an “an increasingly uncertain economic, policy and geopolitical backdrop”.