original mungerville

Yup. Sugar is a killer ...as are processed foods which, very non-technically expressed, effectively breakdown into sugar in your bloodstream. No way for the average person to get in awesome shape in your late 30s / 40s / 50s without focusing on this.

Maybe she is retarded? Or maybe she really wants to raise rates 25 basis points soon and so given she can't point to the economy or jobs, she is pointing to equities? Maybe she doesn't have the courage or maybe she doesn't have any clue what is the right course of action just like everyone else?

Earth to Janet: Ya, they are high because the Fed wanted them high!... create a wealth effect with QE! WTF???

I largely agree. One poster was suggesting FIH NAV could be recreated buying Indian public equities and therefore a premium to NAV for FIH is not warranted. Meanwhile, my feeling is that 1) several of these deals are going to be purchases of private businesses which can be purchased at far lower p/e ratios relative to public equities in India. Further, they will tend to seek out 2) trustworthy management whereas many managements of public businesses in India can be corrupt to a degree (this also happens in other countries, including developed countries) and 3) with managerial rather than entrepreneurial skills/tendencies (ie the private businesses purchased by FIH will be more entrepreneurial). I could then see FIH trying to take these public to realize the NAV increase upfront rather than wait to have earnings build over many years. So buy at 8x earnings, operate for a few years and once major expansion plans are in place, take public to fund those plans while moving the p/e from 8x to 16x or higher.

But Gio was talking about 22% gross return which presumably means before all fees and expenses. My understanding is it is a 20% performance fee above 5% plus a 1.5% management fee. So 22% - 5% = 17% * 0.2 = 3.4% performance fee plus 1.5% = 4.9% or roughly 5% total. So 22% gross becomes 17% net. One critical question here is does FIH plan to hedge the dollar/rupee exchange rate or not? (And were the HWIC Asia Fund investments hedged or not?) As one poster previously alluded to, currency hedging or exchange rate losses could be an important cost over time given India's past inflation rates. Has anyone dug into this?

You are saying the investment fund returns need to have "carry" associated with them to beat the index...I'm not following. What carry are you referring to?

He did sell (somewhat). He used his inflated HNZ equity to buy reasonably priced KRFT equity. Maybe? I don't think he looks at it like he sold Heinz at all. I think he figured adding $10 billion in equity plus Heinz to merge with Kraft was a value creating opportunity relative to Heinz stand-alone because 1) it permits 3G to cut $1.5 billion from Kraft costs, 2) allows Heinz to refinance its debt to investment grade, and 3) provides more product for Heinz's global distribution system to push through.

Just thinking about this further, Buffett just had to add $5 billion in common equity to get this deal done and what he gets in return is his portion of the gain in market value from $28 billion to $42 billion - so that's 50% of $14 billion or $7 billion. So Buffett's incremental return on that incremental $5 billion he just added for this deal is $7 billion or 140%. No wonder he is smiling (despite this deal meaning his lucrative $8 billion preferreds yielding 9% will now get called at the first call date). He is therefore starting with massive returns already relative to someone buying in at $89 per share.

Well, if you look at my math in the above post, at $89 per share right now, 3G and Buffett are currently up 150% on their initial investment in Heinz. Maybe deduct 150% returns from BUD and BKW, then see what the remaining annual return is - this could be our return I guess from here. Any idea what that number is?

Zorrofan, I understand your point, looking at it from Buffett's perspective is a really good idea. And I thought of that as well - it didn't get me anywhere, not necessarily because there is nothing there but maybe because I can't think about it correctly. Having said this, you have to be very careful with this "Buffett put in an extra $5 billion and he is looking for better returns" angle at this point. At $89 per share - Kraft's market cap is $52 billion. After the one-time dividend of $10 billion, its at $42 billion. This is the value of current Kraft shares which right now represent half of newco. So the implication is that newco's market cap is $84 billion at present. Now let's play with some numbers on Heinz. 3G and BRK put in $4.5 billion each in common a couple years ago for a total of $9 billion. Buffett has been giddy about the progress, so let us make an aggressive assumption (which for the sake of the point I am making is a very conservative assumption) that that doubled in value in the last two years to $18 billion in common equity value for Heinz stand-alone (this does not include the $8 billion preferred or the Heinz debt as this whole analysis is on common equity grounds). So we are assuming Buffy has already made a 100% return on his common. Now, 3G comes up with this idea of a Kraft merger. They make the announcement, take the $18 billion Heinz common value, add $10 billion total for the one time dividend, and, in a matter of 3 days, this is now worth $42 billion of newco. $28 billion became $42 billion or a 50% increase just because of this deal. And remember, I was reasonably conservative with the 50% increase for the deal because I assumed the Heinz common Buffet bought had already increased 100% pre-deal. So Buffett is, with this deal, starting at a +50% advantage to us (again that's after making the very conservative assumption - for the purposes of this argument - of a prior increase of 100% in the value of Heinz). So if you think you are going to get a 5-10% return annually from this price, multiply that by 1.5 for Buffett's return from this deal or 7.5 to 15% annually which meets his rate of return. Maybe now you could say, hey he made his 50% he should sell. Well its not that simple because a) he publicly committed to the deal which is part of the rise in value of the stock of newco, and b) he would have huge capital gains now (ie he owns half of $42 billion or $21 billion on an investment of $4.5 originally for Heinz common plus his $5 billion contribution to the one time dividend; so his capital gain would be $21 billion - $9.5 billion or $11.5 billion; 20% tax on that would be 2.2 billion. So, how far do you want to take the "Buffett is going to get a good return so I am" argument based on these numbers?

IMO this is a stock with a muted downside and potential for positive upside surprises. Not in a hurry to sell, but would if a better idea came along. Why go to cash when you could earn 7-10% a year in a stock that will likely be a buffer in a down market? I don't disagree - this is why I bought in the first place. However, you could buy Berkshire which has more diversification and do the same return. My main point is that I wouldn't get too excited about this thing at this valuation.

I was just thinking about ERICOPOLY as an example of asymmetric risk-reward payoffs. This, to me, is the way to proceed. Now, I have no fuckin' clue about the bike riding reference - can you elaborate on what you are getting at? Do you mean that many on this thread are too risk averse in various areas of life but not risk averse enough in others - like biking? Or something else? The bike riding reference is an allusion to our troubles as humans. We worry the most about exotic risk. You'll find people who are afraid to swim at the beach because of sharks, but they don't plan their daily life around driving fewer miles on highways. They would feel safer driving across the country and fell more relaxed in the face of that greater risk. Personally I'm terrified of riding a bike on the road. I focus too much on the downside. But I go in the water at the beach, I drive on the road, ski, skateboard. I used to hike alone in the wilderness. And I used options for leverage. Gotcha.

I was just thinking about ERICOPOLY as an example of asymmetric risk-reward payoffs. This, to me, is the way to proceed. Now, I have no fuckin' clue about the bike riding reference - can you elaborate on what you are getting at? Do you mean that many on this thread are too risk averse in various areas of life but not risk averse enough in others - like biking? Or something else?

Funny, in the original Money Masters book I believe Train said one way to get rich was to buy land in exactly this way - direction of expansion on outskirts of a fast growing city.

He's interesting, he talks a lot and thinks a lot but does almost nothing which concerns me a bit. He's sitting in India on land he bought 7 years ago which is looking like its going to be worth a few million (was on the boarder of the city in the direction of development as we reasoned there was only one direction for the city to expand; now its dead center of one of the largest IT/BPO parks being developed in the city). For Indian cost of living, that's pretty good - translated to North America, that might be 10 million in buying power. Now, after a long vacation (a few years), he has seen every temple/monk/restaurant/ read every classic book he had on his list, etc etc and is looking like he is onto Phase 2. We'll see where Phase 2 brings him, but so far, he is surprisingly on track despite his philosophical sloth like behaviour. He is the smartest guy I know by far however and very very personable. He is off the charts in terms of intelligence.

I agree, I am also a strong believer in India's future. The demographics are amazing relative to other economies. About 12 years ago, I started a very small business there which was operated for a couple years after which we shut it down. My partner, however, went looking to buy commercial land on city borders thereafter and I invested with him. This land now, even with the prior government in place, is now worth multiples of what we paid and our plan is eventually to put a large multi-floor condo building on it - say 5 years down the road. We also bought other smallish plots of urban and rural/agricultural land that have done quite well. All that to say, it looks like I am already quite heavily invested in India relative to my net worth (assuming this land continues to appreciate). This is the main reason I am hesitating with this Fairfax fund because I agree that this seems like a special opportunity despite the management fees. Importantly,

Sure management is worth a premium and over time they would likely do another combination - but this would not occur for a couple years, but a 22x-24x multiple should already include that. In terms of low-balling. They are stating $1.5 billion in cost savings, plus I estimated 200-300 million interest savings on the refi of $9 debt to investment grade, plus redeeming the Berkshire preferred of $8 billion (about $500 million). That's a total cash flow/EBITDA savings of $2.2 billion or roughly a quarter of the forecast $10 billion in EBITDA (although the preferred redemption doesn't fit nicely into EBITDA savings more EPS, but anyway). So even if 3G gets cost savings of $2.5 billion instead of $1.5 billion (which I think every analyst would agree would be very aggressive), that would only move the needle on the $10 billion by 10% which may translate into EPS of 15% more. Its just really hard to move the needle unless they 1) do another merger, or 2) begin a very significant international expansion in relatively short order. Having said all this, relative to the average stock in the S&P 500 which is at very elevated levels, I agree that the less cyclical nature of Kraft-Heinz earnings combined with the potential for future growth should lead to outperformance. But to be clear, that isn't saying that much because the S&P 500 probably will grow less than 5% annually over the next 10 years.

I agree. You need scalability, otherwise why bother - the upside will be relatively limited. What you really want is not leverage as that usually cuts both ways, instead you want asymmetric pay-offs like call options. Putting effort into a scalable business is asymmetric: your down side is limited to the opportunity cost of your time while your upside is huge. A serial entrepreneur trying to make a bunch of very asymmetric situations successful should eventually get a very large pay-off. I have a good friend/business partner. He isn't rich, but don't talk to him about something that can make a million or two, he doesn't get out of bed to make a million, his head space is always "Ok, my minimum goal is $100 million by xx date, can this get me there". He is very risk averse yet very focussed on this huge upside goal. He wants big scale with no to limited downside. That's basically all he thinks about.

Hell who knows, maybe the analysts are saying slap 24x on this thing now at $3.70 per share or $89 plus 16.5 for a value of 105.5. In terms of a discount rate, we'll use 6% because this is in a stable sector. And at $89 per share ex the one time dividend, the dividend rate (ie $2.20 / $89 per share is just north of 2.4%) is 2.4%. So we need to discount by 3.6% (ie 6% minus 2.4%) per year for 2.75 years - or around 10% total. So let's just say this thing is worth $89 X 0.90 = $81 plus the 16.5 dividend = $97.5 right now (that's using 24x!). Now, that would be a very very full valuation in my book (I don't usually pay much over 10x, often 5x, once in a while 15x). So, we are at $89 at close today. I bought at $81 in a non-taxable account, but does anybody really think I should hold on at $89 (which is about a 22x multiple 1 Jan 2018 discounted at 6%) to try to get to $97 (or a 24x multiple). I think I sell Monday. I certainly wouldn't be jumping up and down excited at this valuation, right?

How much money is there to be made - doesn't look like much. I bought at $81, with the stock at $89 already how much further does this have to go?

Of all the numbers, the following was the most straight-forward for me: On the conference call, one of the 3G guys said by 2017 the merger would be earnings accretive relative to forecast Kraft earnings (I am assuming also for 2017) without the deal. So if that is $3.70 a share (Yahoo analyst estimates for 2015 are 3.23 per share; for 2016 they have 3.46 so I just extrapolated a bit for 2017) - using a 16x multiple I get $59 plus the $16.5 dividend = $85.5 - using 20x, that is $74 plus 16.5 = $90.5 Now remember, these are forward multiples at 16x and 20x respectively. You've got to get to 1 Jan 2018 to have a backward looking multiple - that's 2.75 years away. So I certainly would not use a 22-24x multiple now - 2.75 years ahead of time.

Can FFI only invest in public stock holdings in India?... or does their prospectus say they can also buy private businesses and do joint-ventures, etc? Does it matter? They will certainly pay a premium for growth and that is already reflected in the NAV. A premium on FFI is like a premium on a premium. (And you pay fees for that luxury, so in reality it should trade at a slight discount to NAV.). Otherwise FFH could just setup a hedgefund on a hedgefund on a hedgefund on a hedgefund and in the end you pay a 1000x premium on the original business. The stock market crash of 1929 came through this type of packaging. Ya it matters because private businesses might sell for 5x earnings whereas the stock indices aren't exactly that cheap in India. I wasn't trying to argue, I just was asking whether or not they could invest in private businesses or not. Do you know the answer to that off hand?

Can FFI only invest in public stock holdings in India?... or does their prospectus say they can also buy private businesses and do joint-ventures, etc?

Share price rising 5% today. Any news? Or is it indexers and closet-indexers having to buy more given Heinz portion is effectively going public creating a larger market cap of the new Kraft-Heinz?

Longinvestor, This is interesting, can you describe/elaborate on this business just a bit - and the potential you see in it.