original mungerville

Just had a quick look - do you need to deduct the US$8 bn of 9% preferreds that Berkshire owns to arrive at the common equity value? The prefs are at a parent company level (which was the financing vehicle for purchase of HJ Heinz - named Hawk Acquisition Intermediate Corporation I), not at the operating company level of HJ Heinz Corporation II which the 10K discloses below. http://www.sec.gov/Archives/edgar/data/1600508/000160050815000011/hnz10k122814.htm On June 7, 2013, H. J. Heinz Company ("Heinz") was acquired by H.J. Heinz Holding Corporation (formerly known as Hawk Acquisition Holding Corporation) (“Parent”), a Delaware corporation controlled by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Special Situations Fund III, L.P. (“3G Capital,” and together with Berkshire Hathaway, the “Sponsors”), pursuant to the Agreement and Plan of Merger, dated February 13, 2013 (the “Merger Agreement”), as amended by the Amendment to Agreement and Plan of Merger, dated March 4, 2013 (the “Amendment”), by and among Heinz, Parent and Hawk Acquisition Sub, Inc., a Pennsylvania corporation and an indirect wholly owned subsidiary of Parent (“Merger Subsidiary”), in a transaction hereinafter referred to as the “Merger.” As a result of the Merger, Merger Subsidiary merged with and into Heinz, with Heinz surviving as a wholly owned subsidiary of H. J. Heinz Corporation II (formerly Hawk Acquisition Intermediate Corporation II) ("Holdings"), which in turn is an indirect wholly owned subsidiary of Parent. Each of the Sponsors own 425 million shares of common stock in Parent which, in turn, indirectly holds 1,000 shares of common stock in Holdings. In addition, Berkshire Hathaway has an $8.0 billion preferred stock investment in Parent which entitles it to a 9.0% annual dividend, and warrants to purchase approximately 46 million additional shares of common stock in Parent. The short answer is "yes" - see my above post which clarifies that they intend to refinance the preferred with tax deductible debt in 2016. This means net debt would increase from $20 to 28 billion in 2016.

Some important adjustments to the quick valuation: 1. They have stated they plan to buy in the $8B Berkshire preferreds in 2016 (these yield 9%! - that is an after tax cost to common shareholders) using debt issuance (BBB-) of the same amount (so figure, I don't know, something like 4% pre-tax or 3% after tax for the debt for a cash savings for common shareholders of the difference 6% (ie 9% minus 3%) of $8 billion or around $500 million; this is consistent with Kraft's merger presentation where they state savings of $450 to 500 million). All that to say net debt increases from $20 billion in 2015 to $28 billion in 2016 to buy-in the Berkshire held preferreds, however there is an extra 0.5 billion going to common per year because of this planned exchange in 2016. 2. They are going to refi $9.5 billion of Heinz high yield debt with the same amount of investment grade debt on close of the transaction - ie H2 2015. I'll guess that is a 3% pre-tax savings or 2% savings after-tax on $9.5 billion - so $300 million pre and $200 post-tax savings respectively. (Note: both 1 and 2 above are in addition to the announced 1.5 billion in synergy savings) 3. They are targeting $2 billion of debt pay-down in 2 years (other cash requirements will be around $2 billion required one-time to achieve the $1.5 billion in annual synergies they have planned for; also they will maintain the same dividend for the next 2 years and thereafter, plan to either maintain it or increase it). In summary, their baseline seems to indicate $28 billion in net debt by 2016 minus $2 billion for $26 billion in net debt by 2016/17. 4. I agree that the 2015 dividend should be included.

Yes, my understanding is the same as Zorrofan's. Refinance savings are in addition to the 1.5 billion.

So we have the cost cutting plus potential international expansion long-term via Heinz infrastructure plus Buffett confirmed (but did not want to say it directly) that they would likely look at other acquisitions via Heinz/Kraft - just like all his other businesses. The news anchor noted there was not that much debt and so maybe future acquisitions could be done with some debt.

Buffett confirms there is substantial potential to expand Kraft brands internationally using pre-existing international Heinz infrastructure. http://video.cnbc.com/gallery/?video=3000364700

I know. But if you assume they pay debt down 25% (based on Fitch's projections) and tweak your dividend assumptions slightly, you get 14% IRR. Well with an ROE of 20%, and say a dividend yield on book value at 6% or something, that leaves 14% retained earnings to grow the top line at say 4%...so 10% of GAAP earnings or roughly half of GAAP earnings is not needed to maintain the dividend or grow the business. This should mean roughly half of owner earnings can go to debt repayment. Very roughly.

How much value does the have-to-have Heinz brand and its domestic presence bring to the pricing power / shelf space negotiations of a Kraft with its less powerful brands - just purely on a domestic basis. If that domestic value was significant, that would be a good tailwind

I was looking at this too and listening to what Buffett said on CNBC this morning. It basically looks like a double, DAY 1! That certainly seems like a hell of a deal for Berkshire. I think it's more like a double, Year 2. Also, on the "2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. " point - there are certain brands - Philadelphia Cream cheese for example - that Kraft did not retain the International rights to. Perhaps Mondelez will make a deal to send them back to Kraft, but there may be a few brands like Philly that can't just be plugged in to the Heinz international distribution network. Thanks re Cream cheese example, I was wondering if this was the case internationally.

Quick back of the envelope: http://seventeenmile.com/2015/03/25/events-kraft-foods-group-merger-analysis-march-2015/ Thanks - am digesting this.

Now that you are gutting the sucker, despite the price jump in Kraft shares, is it still a good idea to buy Kraft in the low 80s? This is the question I am trying to figure out. My nose tells me there is value and am now trying to figure out if this makes any sense. I see two big value generators for the combined company: 1. The cost cutting that 3G will do - I here that is around $1.5 billion per year in savings. 2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. (There may also be some domestic benefit to Kraft brands as the Heinz brand is probably more of a "must have" brand, and therefore Kraft sales may get a bit of a bump domestically via greater leverage with grocers, etc). I am looking to put together the valuation relative to owner earnings of the combined company focusing on #1 only at this point. What is the starting multiple. Any views?

I see two big value generators for the combined company: 1. The cost cutting that 3G will do - I here that is around $1.5 billion per year in savings. 2. Over the longer-term, Kraft should be able to leverage Heinz's international distribution. (There may also be some domestic benefit to Kraft brands as the Heinz brand is probably more of a "must have" brand, and therefore Kraft sales may get a bit of a bump domestically via greater leverage with grocers, etc). I am looking to put together the valuation relative to owner earnings of the combined company focusing on #1 only at this point. What is the starting multiple. Any views?

This seems like a good way to look at it. Can you elaborate a bit on this. (I am trying to figure out if buying Kraft at $80 or so at this point makes any sense or not. My nose at this point tells me it may be, however, I still have to get my head around the valuation relative to earnings power of the combined company).

Based on those three fee structures, it looks like his business plan expected 12% returns on partnership assets. 12% returns provides Buffett with 2% on assets as a management fee under all three fee scenarios.

My dad was quite good - in his day he was in the top 5 in Canada. I once got to practice against the #1 chopper in China, overall he was ranked in the top 10 to 15 in China then. I could not even return his serve. I used to play a lot up to the age of 12-13, then I switched to bball only. At the time, based on the rating system back then, I probably would have been around 1350 or so. You look pretty good though - probably better than that?

I happen to like him. He is certainly much more virtuous than the industry he criticizes.

That's Jeremy Grantham I remember: if you listened to him, you would not have made money for the last 20 years. Except for two crashes, perhaps. Wrong, if you listened to his long-term views on the year 7-10 predicted returns of various assets over the past 15 years, you would have made money. Like I said, he like others, has trouble picking when the turns will happen - otherwise, he'd be as rich as Midas! That stupid analysis does not look at the long-term predictions by asset class made in his asset class forecast, it just uses interview quotes where he is asked to basically guess which way the market might go in the near-term. He answers, but that is just not what he does in his asset class forecast which has a 7-10 year horizon and is usually quite accurate.

My experience following GMO is that they are accurate over the long-term. Their 7-10 years forecasts are pretty damn good. They, like all of us, have trouble predicting when the markets will turn... but they don't try and do that with their 7-year forecast. Its pretty reliable I believe.

Did the fund raise $US or Cnd?

I advocate gold for at least 10% of a portfolio at this point because we are no longer in a financial industry bubble, it has morphed to a central banking bubble - probably the largest of all-time. I see the potential (not necessarily an eventuality, but a significant potential) for a monetary crisis in the shorter to medium term (ie say next 5 years) maybe even starting in the next year or two. Holding an asset like gold which doesn't earn any income is certainly OK relative to cash in many parts of the world at this point as deposit rates and bond rates have gone negative! So, in a relative sense, gold IS producing income at this point. I agree with Buffett that over a 100 years, you want to be in equities not gold. Same for 50 years. However, in the next 5 years, I believe at least a portion of a portfolio should be allocated to gold. Equities will not do well in deflation, nor will they do as well as gold if we get a hyperinflation (I don't see strong inflation as an option, as I see that quickly turning to hyperinflation if it were to occur). Lets hope we continue to muddle through. My major concern is that the next US recession may happen and central banks will have no ammo left, or will have to do something completely insane such that the monetary system could break down. This is not a forecast, only a possibility.

Look, I hated the Greenspan era and shorted the Nasdaq in 2000, in September 2007 I shorted the S&P 500 predicting a collapse of the banking system (I was precluded from shorting financials due to conflicts of interest), I think the party is over once more for equities in real terms (but the timing is extremely difficult) and that the free lunch the central bankers have been providing financial markets with is about to get costly. My view is that this cost may be incurred via a drop in nominal prices of financial assets or a rise in precious metals and/or the US dollar - that may happen in 2015 or years from now, I don't know. Its not exactly the time to get overly bullish on equities. I own only 2-year call options (LEAPS) on Valeant at this point, which protects my downside to a degree.

I'm going to hold my call options on the dollar index (UUP) through this year - I am very negative on macro, my view is either precious metals rise or the US dollar rises (potentially importing deflation/weakness into the US from overseas - which would send the value of Prem Watsa's US deflation options upward, US bond yields down potentially, lower corporate profits, etc, etc). But hey, this could happen in 2015 or it might take 3 more years.

The dollar has come a long way very fast. I have a pretty negative view of things. The fact central bankers in Europe and Japan have to print so much money when the Fed stops printing - just to hold this whole ponzi scheme together - is not lost on me. I was lucky to buy call options on the dollar index (via UUP) some months ago (but I also hold precious metals - which I guess in effect is buying precious metals in euros and yen and any other non-dollar currency for that matter). Who the hell knows how this ends or when - but my feeling is there is no free lunch out there, and the bill is going to be very costly. I do think the dollar is likely to rally more (but who the hell knows). At this point, I recommend people at least own some precious metals (eg, at least 10% of your portfolio, 20% if you are a big bear like me) in physical form rather than only equities denominated in depreciating currencies. Its not going to matter at all until it really does. So I focus on this rather than currency fluctuations despite getting lucky with this recent dollar index bet.

I'm generally eating the same as rkbabang. The exception is 30 minutes after a very intense resistance workout (about 3 times a week) I eat pretty much any type of carbs I feel like - cereal, pizza, etc. - as the body can handle the overload of those bad carbs at that point without them being converted to fat. And once a week, I'll have a cheat day. Between the 3 X 30 minute cheats, and the once a week cheat day, its actually quite easy to maintain - which I have for the better part of the past 3 years. I feel like I can eat pretty much anything, just have to watch the timing - and obviously the overall quantity of bad food taken in is a fraction of what it was. After a while, I dropped the cheat day as I no longer needed it.

+1! I can tell you exactly why I'm fat and overweight. It has nothing to do with sugar, gluten, etc, but the fact that I do not eat a balanced diet and do not get enough exercise. You eat too many calories and don't exercise at least three times a week, your body will slowly, if not over years, become unbalanced and your health will deteriorate. It's as simple as that! Not that sugar is toxic, or whatever smoke people are blowing up your ass these days. Anything in a large enough dose will kill you...even water! Your body is self-regulating and a prime piece of technology...to call it a marvel of engineering is an understatement. Yes, processed foods over the years have increased the amount of sugar and sodium levels in them. But it all still comes down to a balanced diet, watching your total caloric intake and a moderate amount of exercise. Those three things will take care of a whole host of other ills. 15 years ago, scientists and doctors said you shouldn't consume more than a few eggs a week. Now, doctors and scientists are saying that eating a couple of eggs a day isn't an issue. Red meat, coffee, sugar, salt, butter, alcohol, and whatever else go in and out of favour every decade. The real problem isn't sugar or fat, but the sheer size of the portions we get these days. It all started with Big Gulps and Supersized...7/11, Costco and McDonalds should all get the same amount of blame! If you went to a restaurant 20-30 years ago, their dinner plate is today's appetizer plate, and today's dinner plate can hold twice as much food as back then. A Big Mac used to be the biggest burger you could eat when I was a teenager...today it's about the same size as a fully-loaded "L'il Buddy Burger" at Five Guys! That's the little burger at Five Guys...the one children order these days! Even if you order something healthy at a restaurant, the portion size is huge. So while you may be eating a nice salad, the total caloric value of that salad may be well over 1,000 calories. A 7 oz steak, with vegetables and mashed potatoes is healthier and less than 2/3rds of the calories. You could add a Coke and still come in under the salad. And then you have all of the food porn that people love! Inundated with food culture, and the fact that acquiring food gets easier and easier, while lifestyles are more and more sedentary, you can easily see why the world is becoming fat...and it isn't due to the sugar, salt, fat or gluten. Cheers! Sorry Sanjeev, but I disagree with you here. I have a desk job, spend an hour in my car, and don't exercise, yet I am no longer fat, no longer have typeII diabetes, no longer have fatty liver disease, no longer have high cholesterol, no longer have low HDL, no longer have high triglycerides, and I weight about what I did when I graduated high school after being obese for almost 20 years. I lost 65 lbs in 2010-2011 and kept it off simply by changing what I was eating. I haven't yet tried rocks or dirt, but I switched from an atrocious SAD (Standard American Diet) to a lowish carb paleo type diet. I eat organic vegetables, quality meats (grass fed beef, local heritage breed pork, free range chicken, etc), my own free range eggs from my chickens, good fats (grass fed butter, MCT oil, non-hydrogenated lard, coconut oil, palm oil, olive oil), very little fruits, nuts, seeds, and legumes, and no grains. I drink only unsweetened coffee/tea or water. If you change your diet without exercising you can get healthy, if you exercise without changing your diet you can't. EDIT: Of course it is probably better to do both. I agree, I have always exercised. A lot when I was younger and I could eat anything. But, only since I started watching what and how much I eat, did I take the pounds off. You just don't burn that many calories when you exercise, if you eat shit, you put those back on in the first 45 minutes after exercise with your first bad meal. (Unless of course you are swimming where you get the double whammy of calories from exercise plus calories from thermo-dynamic loss of body heat into the water - there you burn a shit load of calories.)

The exercise program is good. You are eating some good foods. The animal protein has helped you build up your muscles and strength, but should not be necessary to maintain that strength now that you have it if you continue to exercise. Keep up the good work. :) LC, Your eating looks pretty good to me. I don't think, however, that is the optimal amount of protein to gain significant muscle mass / bulk up. But 180 grams per day should do it. This is basically impossible on a normal diet (I can do about 120 grams max on normal food - and that isn't easy) - so you need some protein powder to get you there. Take in a lot of that just before, during, and mainly after a work-out (maybe 50 grams around the workout) and then take the rest some other time during the day. Buy the cleanest stuff possible - usually low calorie to protein ratio, and low sugar. Also just eat like a pig up to 30 minutes after a workout, this is when you can drink a lot of milk, whatever and your body will tend to send that to your muscles rather than to fat. Basically if you are trying to bulk up, a lot of milk right after the workout could be a good idea. If you take in 180 grams per day, and do 2-3 sets of 3-5 repetitions of weight where you bring it down over 5 seconds, and ensure you are using weight which effectively maxes you out after the 3rd or 4th repetition. And also only lift once a week for each set of muscles (your muscles need time to rest so they can grow). I think you'll bulk up pretty fast. There is some good stuff in the Four Hour Body (by Ferris) on this. That book is probably worth skimming - there is a chapter on how to bulk up. Looks like you are already lifting heavy, but Ferris makes the point it 1) has to be really heavy, 2) the muscles need time to rest, and 3) you need a shit load of protein (around 170-210 grams depending on your weight) and also a good amount of calories per day (I forget, but its quite a bit). I strongly disagree unless LC's goal is to have a bulky body builder physique, regardless of long term health consequences. That kind of diet is the way to an early grave. Dr. Adkins (yes he of the high protein Diet Revolution) was 100 pounds overweight with obese fat at the time of his death from a massive heart attack . If he is trying to get from 160 to 180 lbs at 6 foot and do that in terms of muscle rather than fat, its not exactly easy. This is not Adkins, this is just fact - you will build muscle quicker with high doses of protein, heavy lifting and lots of rest. I was talking to a kid the other day who has Ontario Hockey League potential. He was lifting and the coaches also had him on a couple hundred grams of protein a day. Seems like you equate protein with long term health problems.