On February 14, Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), along with 3G Capital, announced that it is buying ketchup kingpin H.J. Heinz (UNKNOWN:UNKNOWN). Almost immediately following the announcement, investors started questioning whether Warren Buffett -- Berkshire's CEO and a noted value investor -- was paying too much for Heinz.
In the grand tradition of a picture being worth 1,000 words, here's why I'm convinced Buffett is making out like a bandit here:
Excluding the debt that was already on Heinz's books, the total deal value was around $23 billion. To pay for that, roughly $7 billion is coming from new debt, $4 billion will be paid by 3G for equity, another $4 billion in equity will be purchased by Berkshire, and a further $8 billion or so will be contributed by Berkshire in the form of preferred stock.
Put this all together, and you get this: Berkshire financed slightly more than half of the deal value, but out of the gate (based on my estimates), it's getting around 70% of the company's profit. That works out to a return on investment of 7%, which I dare you to find from a company that's as large, stable, and reliable as Heinz.
Of course, while the headline says that "Buffett" wins with the Heinz deal, he's not alone. Though Buffett is the largest Berkshire shareholder, there are plenty of other Berkshire owners out there -- myself included -- that will win with this deal as well.