You Can't Match Buffett's Deals

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 (NYSE: BRK-A) (NYSE: BRK-B) 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 Heinz (HNZ +0.00%) 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.

If those warrants bear any resemblance to past deals that Berkshire has done, they may allow Berkshire to get free upside from current levels. In the deals that Berkshire has done since the financial crisis to make capital infusions into public companies, those warrants have turned what would have been perfectly good investments into truly great ones.

Consider Berkshire's past warrant deals:

• With General Electric (GE +0.01%), Buffett invested $3 billion and received preferred stock yielding 10% and warrants to buy $3 million of common stock at $22.25. GE redeemed the preferred stock in 2011, netting Berkshire $1.2 billion in profit from dividends. Moreover, the warrants don't expire until this October, and with the stock currently at $23.75, Berkshire is sitting on another roughly $200 million in paper gains.
• Berkshire did a similar deal to provide $5 billion to Goldman Sachs, getting back 10%-yielding preferred stock and warrants to buy 43.5 million shares of Goldman common for about $115 per share. Goldman bought back the preferred in 2011, and Buffett said at the time that he anticipated exercising his warrants this year. With Goldman trading near $160, the warrants could give Berkshire an extra $2 billion in profit.
• Perhaps the most lucrative warrant deal Berkshire made involves Bank of America (BAC +0.00%), where the company got 700 million warrants that expire in 2021 as part of a $5 billion financing package that included preferred stock yielding 6%. With the exercise price at $7.14 and the stock more than $5 per share above that level, the warrants alone are currently worth $3.5 billion.

By giving Berkshire both dependable income and an equity kicker, Buffett has gotten a lot more profit potential from his deals. Those are negotiations that most investors simply don't have leverage to get done.

You can still be a value investor
You may not be able to get the same deals that Buffett has scored for Berkshire through the years. But by paying attention and getting into stocks of good companies when they're artificially depressed, you can produce the same stellar returns in your own portfolio.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.