Maybe Warren Buffett and 3G Capital Should Have Tension Over Kraft Heinz

When Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) and private equity firm 3G Capital teamed up to orchestrate the acquisition of Kraft by Heinz (KHC -0.21%), it was a big deal that has apparently been a big miss. Buffett now admits that he significantly overpaid for Kraft, and the market cap of the joint company is now less than half what it was a year ago. So the rumors that there was friction between the partners are at the very least understandable.

In this segment from MarketFoolery, host Chris Hill and senior analyst Jason Moser discuss those rumors, Buffett's denial, the issues at Kraft Heinz, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 25, 2019.

Chris Hill: Speaking of slowing growth, let's talk about Kraft Heinz. Shares are down about 50% or so this year. There have been reports of trouble between Berkshire Hathaway and 3G capital. Bears remembering that those two teamed up a few years back to buy Kraft Heinz and got a lot of headlines at the time, and rightly so, in part because Warren Buffett had, up to that point, a track record of making acquisitions essentially on his own. So at the time, it was like, "Wow, here's this new deal." Also, Buffett has been critical in the past of private equity. It raised a couple of eyebrows that Berkshire Hathaway would team up with a private equity firm, even one with the reputation of 3G Capital, and then go out and buy Kraft Heinz.

Apparently, these reports...you hear little rumblings here and there. It never struck me as something that was front-page news. Maybe I missed it. I don't know that The Wall Street Journal had some splashy headline on the front page about some big rift. But apparently, Warren Buffett felt the need to reach out to CNBC and come out today and say that there's no tension between Berkshire Hathaway and 3G. He really downplayed these reports.

I don't know your reaction, but my reaction was, first of all, given what's happened, given the way Kraft Heinz has performed, particularly over the last two years, the writedowns that have happened for Berkshire Hathaway, the fact that Buffett has had to come out and say, "Oh, yeah, we paid too much for this," I think any reasonable person would expect there to be some level of tension. That seems like a little bit of he doth protest too much.

Jason Moser: Your Slack message made me laugh on my way to work. "Really? Shouldn't there be some tension?" Yeah, you're damn right there should be tension! The stock has gotten killed, and for a lot of not necessarily easy-to-fix reasons. Misreporting notwithstanding, restatements notwithstanding --

Hill: Just to add parenthetically, yes, Kraft Heinz, also some accounting problems.

Moser: We've certainly we've seen other companies have that. You're talking about something that's very fixable. You can recover from it. The thing about this deal that always struck me, on the surface, it's right in his wheelhouse. Consumer brands, not tech-related. It's food. It's something you associate with our childhood. A lot of these brands, you and I associate with our childhoods. I think that's part of the problem. I know he said that the biggest problem facing Kraft Heinz is that Heinz overpaid when merging with Kraft in July, and then they made a mistake in overpaying for that investment. I think it goes far deeper than that. I think these are brands that are not resonating with younger generations of consumers today. I don't think that necessarily changes so quickly, particularly when you see the attitudes toward what people are eating, the brands that are coming up from that, the nature of being able to get out there and brand build that didn't exist when we were growing up, via social media and other channels.

It's not to say that this is some trip to zero. I don't think that's the case. There's value in Kraft and Heinz and Philly cream cheese and whatnot. But I don't look at those as brands that are going to be leading the way going forward. For them to just think that overpaying was the problem misses the point entirely.

Hill: I'm not rooting against Berkshire Hathaway. I'm not rooting against Warren Buffett. But to be completely honest, part of me is heartened by the fact that, yeah, Warren Buffett's human. He would probably like a mulligan on this one. From time to time, we talk about sunk costs, and how that's hard to fight against as an investor. Turns out, it's hard for Warren Buffett to fight against. At the time of this deal in 2013, one of the things Buffett said at the time was, "Oh, yeah, I've had my eye on Heinz going back to 1980." For more than 30 years, he had, on some level, been looking at the Heinz business and saying, "Boy, I sure would like to get some of that."

Moser: And ironically, had he made that investment back then, I'm sure things would have worked out a lot better. You hit on something there that I would love to know. Given a mulligan, if you could have this deal for half of what you paid for it, would you do it again? I'd ask Buffett that question. Would you do it again if you could do it for half? Maybe he would, maybe he wouldn't. I think the value investor in him quite possibly would. I would still question that. Again, it goes back to, sometimes things are cheap for a reason.