3G background-why Buffett likes them

[Spekulatius]

No wonder, he likes 3G, he provides some funding and his reputation, and they do all the work. It's a great arrangement for the old fool, who would not like such a deal and the folks that make it possible?

[gfp]

Easy peasy, all it takes is complete trust and the ability to send tens of billions of dollars in equity on a week's notice plus unmatched access to credit markets

 

No wonder, he likes 3G, he provides some funding and his reputation, and they do all the work. It's a great arrangement for the old fool, who would not like such a deal and the folks that make it possible?

[fareastwarriors]

The lean and mean approach of 3G Capital

 

Founding partner Alex Behring talks about the strategy transforming the beer and food industries

 

https://www.ft.com/content/268f73e6-31a3-11e7-9555-23ef563ecf9a

[VersaillesinNY]

How a 36-year-old Wall Street prodigy saved Burger King

 

http://www.businessinsider.com/how-wall-street-prodigy-daniel-schwartz-saved-burger-king-2017-6

 

[Kiltacular]

How a 36-year-old Wall Street prodigy saved Burger King

 

http://www.businessinsider.com/how-wall-street-prodigy-daniel-schwartz-saved-burger-king-2017-6

 

 

Good article -- thanks

[DooDiligence]

How a 36-year-old Wall Street prodigy saved Burger King

 

http://www.businessinsider.com/how-wall-street-prodigy-daniel-schwartz-saved-burger-king-2017-6

 

Add to due diligence checklist: C-suite boots on the ground?

[gfp]

Update on what the 3G principals are up to recently - They have seeded a new type of activist fund managed by Munib Islam, who ran activist campaigns at Third Point for quite a while.  LTS One is the name of the new fund, no outside money so far.

 

https://www.reuters.com/business/exclusive-3g-founders-launch-investment-partnership-with-former-third-point-co-2021-07-27/

 

[gfp]

Bloomberg has an article highlighting the 3G principals' latest troubles -

 

https://www.bloomberg.com/news/articles/2023-02-09/americanas-crash-casts-harsh-light-on-jorge-lemann?srnd=premium

 

https://www.reuters.com/business/retail-consumer/americanas-billionaire-shareholders-say-they-were-unaware-accounting-problems-2023-01-23/

 

Lojas Americanas had off balance sheet supply chain financing that was apparently hidden by previous executives.  (almost $4 Billion dollars worth)

Edited February 9, 2023 by gfp

[Munger_Disciple]

5 hours ago, gfp said:

Bloomberg has an article highlighting the 3G principals' latest troubles -

 

https://www.bloomberg.com/news/articles/2023-02-09/americanas-crash-casts-harsh-light-on-jorge-lemann?srnd=premium

 

https://www.reuters.com/business/retail-consumer/americanas-billionaire-shareholders-say-they-were-unaware-accounting-problems-2023-01-23/

 

Lojas Americanas had off balance sheet supply chain financing that was apparently hidden by previous executives.  (almost $4 Billion dollars worth)

 

Thanks for sharing. I was never a big fan of Berkshire's dalliances with 3G and I think Munger was a lot more suspicious of their methods than Buffett. Funny that these guys at 3G "idolized" neutron Jack. If you read the book Lights Out, Jack was doing borderline fraudulent things at GE pumping up its stock constantly by making up fake earnings from finance division & boosted the leverage dramatically. He also blew the whole succession thing with Immelt who was a big moron. No wonder then Lojas Americanas suffered even worse fate than GE. 

I think the results from 3G partnership were disappointing for Berkshire in the end. 

 

Edited February 9, 2023 by Munger_Disciple

[Xerxes]

 

I thought this was a fantastic podcast covering the Burger King, QSR, Tim's saga with folks at 3G Capital.

Worth listening to.

 

Also posted on QSR thread.

 

 

[schin]

 

I felt it was weird that certain important investment like Buffett's 3G, Lubrizol, Precision Castparts, and Iscar don't get talked about much... but had a lot of fanfare for a period of time. I am not saying all went bad... just dunno... the stories never get revisited. 

[UK]

I remember Munger, adressing a question at AGM a while ago if KO would be better run under 3G, sharply noting, that 3G system (or at least its more extreme version) works well only for the next year or two after its implementation. I think later it become obvious he was quite right on this:)

[schin]

1 hour ago, UK said:

I remember Munger, adressing a question at AGM a while ago if KO would be better run under 3G, sharply noting, that 3G system (or at least its more extreme version) works well only for the next year or two after its implementation. I think later it become obvious he was quite right on this:)

 

I know he touted Jack Welch at GE and also, 3G... and back in the day, there was Al Dunlop with Sunbeam. It works until it doesn't work. 

 

[UK]

1 hour ago, schin said:

 

I know he touted Jack Welch at GE and also, 3G... and back in the day, there was Al Dunlop with Sunbeam. It works until it doesn't work. 

 

 

I do not think he touted 3G, I think he was very skeptical and tried to say this in a witty way:)

[schin]

6 hours ago, UK said:

 

I do not think he touted 3G, I think he was very skeptical and tried to say this in a witty way:)

 

Here is his original thoughts on 3G in 2013, which is positive of 3G:

 

In 2017, they started to recognize the strategy is all focused on extreme cost cutting.... Charlie is more skeptical.

 

[schin]

This makes me think... if Warren underinvests in all his businesses... I know he loves low-cap businesses (See's) and touts his heavy investments in NetJets and MidAmerica -- but, there seems to be more under-invested businesses like GEICO, BNSF that are not keeping up with CapEx. 

 

He's talked about making long term CapEx investments and exec having access to cheap capital, but do they?

 

I see more business slowly dying under BRK... and the frugal culture leads to creative destruction in their markets.

[longterminvestor]

4 hours ago, schin said:

This makes me think... if Warren underinvests in all his businesses... I know he loves low-cap businesses (See's) and touts his heavy investments in NetJets and MidAmerica -- but, there seems to be more under-invested businesses like GEICO, BNSF that are not keeping up with CapEx. 

 

He's talked about making long term CapEx investments and exec having access to cheap capital, but do they?

 

I see more business slowly dying under BRK... and the frugal culture leads to creative destruction in their markets.

I dont see it that way.  I see it more as the "wonderful" business needs zero capital to grow.  and a "decent" business needs capital to maintain and grow.  All the "wonderful" businesses are too expensive for him to own so he has "accepted" the decent business as a good place to store BRK's capital.  There are tax implications to Mr. Buffett stuffing capital into wholly owned businesses as well. 

 

My preferred method of understanding is "needs capital/capital light" rather than "underinvest".  If GEICO needed capital, it is a click away and capital would fall from the sky from headquarters.  The issue Mr. Buffett and future successors face is "is this capital we are re-investing into ______(name the subsidiary) gonna be a good allocation of Parent Co BRK funds over the long haul or is this a waste of $$$, time, effort, energy to save this dying business? - and then what does BRK do with dying businesses inside of the BRK system?". 

 

In the next generation of BRK, we will face questions on what to do with businesses that DO NOT earn their cost of capital.   

[oscarazocar]

11 hours ago, UK said:

 

I do not think he touted 3G, I think he was very skeptical and tried to say this in a witty way:)

 

Buffett has spoken very highly of 3G:

 

https://www.reuters.com/article/business/buffett-says-willing-to-partner-with-3g-again-on-very-large-deals-idUSBREA42096/

 

"I think 3G does a magnificent job of running businesses," Buffett said at Berkshire's annual meeting. "We're very likely to partner with them, perhaps on some things that are very large."

 

https://www.nytimes.com/2017/04/10/business/dealbook/warren-buffett-jorge-paulo-lemann-brazil-conference.html

 

Then, Mr. Lemann’s 3G Capital and Mr. Buffett’s Berkshire Hathaway teamed up to acquire H.J. Heinz for $23 billion. Two years later, 3G Capital, again together with Mr. Buffett, merged Heinz with Kraft Foods.

 

“I consider it one of the largest mistakes in my life that we didn’t really team up as partners until considerably later,” Mr. Buffett acknowledged Saturday night, but that since doing deals together, “he and I are on the same wavelength.”

 

 

[schin]

2 hours ago, longterminvestor said:

I dont see it that way.  I see it more as the "wonderful" business needs zero capital to grow.  and a "decent" business needs capital to maintain and grow.  All the "wonderful" businesses are too expensive for him to own so he has "accepted" the decent business as a good place to store BRK's capital.  There are tax implications to Mr. Buffett stuffing capital into wholly owned businesses as well. 

 

My preferred method of understanding is "needs capital/capital light" rather than "underinvest".  If GEICO needed capital, it is a click away and capital would fall from the sky from headquarters.  The issue Mr. Buffett and future successors face is "is this capital we are re-investing into ______(name the subsidiary) gonna be a good allocation of Parent Co BRK funds over the long haul or is this a waste of $$$, time, effort, energy to save this dying business? - and then what does BRK do with dying businesses inside of the BRK system?". 

 

In the next generation of BRK, we will face questions on what to do with businesses that DO NOT earn their cost of capital.   

@longterminvestor - "If GEICO needed capital, it is a click away and capital would fall from the sky from headquarters. " That is what he has said, but I don't know if that's what has happened in reality.

 

I would not call GEICO and BNSF as "decent" businesses.  Considering how he has touted their prior management and how they were investing in marketing and all these things that has not panned out. 

 

Anyone with BRK as a parent should be able to "outspend" any competitor and make strategic investments... yet, I do not know how UNP and Progressive has higher cost of capital yet been able to take 1st place over BNSF and GEICO, respectively.... the only variable is management... and being outplayed on the court.

Edited October 6 by schin

[xboojum]

5 hours ago, schin said:

I would not call GEICO and BNSF as "decent" businesses.  Considering how he has touted their prior management and how they were investing in marketing and all these things that has not panned out. 

 

Anyone with BRK as a parent should be able to "outspend" any competitor and make strategic investments... yet, I do not know how UNP and Progressive has higher cost of capital yet been able to take 1st place over BNSF and GEICO, respectively.... the only variable is management... and being outplayed on the court.

 

GEICO has never been the largest auto insurer—I believe they were the fifth largest American auto insurer when they became a wholly-owned subsidiary, and a torrent of advertising money grew them all the way to second place (before they fell back to third), but they've at not time have they had more policies in force than State Farm.

[longterminvestor]

12 hours ago, schin said:

@longterminvestor - "If GEICO needed capital, it is a click away and capital would fall from the sky from headquarters. " That is what he has said, but I don't know if that's what has happened in reality.

 

I would not call GEICO and BNSF as "decent" businesses.  Considering how he has touted their prior management and how they were investing in marketing and all these things that has not panned out. 

 

Anyone with BRK as a parent should be able to "outspend" any competitor and make strategic investments... yet, I do not know how UNP and Progressive has higher cost of capital yet been able to take 1st place over BNSF and GEICO, respectively.... the only variable is management... and being outplayed on the court.

I think I understand what you are saying here.  But again, I think the framework of your thinking needs adjustment.  GEICO/BNSF does not take money from headquarters.  To my knowledge, it never has taken money from headquarters.  IF GEICO needed money from headquarters, then it would not be a wonderful business.  GEICO humms along doing what it does from internally generate capital at the subsidiary GEICO level. Can not remember officially if BNSF took money at first to do the capex projects or if it was just debt at BNSF level.  maybe someone knows that one.  

 

Now confusing the situation is fact GEICO is/has been getting smoked by competition.  I chose to think Mr. Buffett totally understands the issue and is solving to leap frog competition - not just make adjustments and "get back to par".  This is a FOREVER GAME and there is unlimited capital chasing a growing pie of customers/premium. Insurance, specifically admitted personal auto, is kinda annoying because you can sit there and watch how everyone else does it (quarterly filings, each state has their own filing system, you can basically watch your competition grow/shrink in front of your eyes (there are games with in the game).  and remember the lessons..."when you do dumb things in insurance, people will find you".  So I chose to think Berkshire is the smart one and everyone else is dumb but my incentive is to think that way so well aware of my bias.  Premium growth alone is not the yardstick GEICO cares about, its growth + profitable business.  Ajit is working on it, Todd C is working on it.  If it was easy, it would have been fixed already.  This is a tough game.  

 

Specifically to BNSF, its a duopoly in trains with trucking as the kissing cousin.  Precision rail roading is "a way" to do it but rail roading is also a complex game and maybe there are other reasons why they haven't done it.  We have to trust that Mr. Buffett, Mr. Abel are capable managers and put the decision to CEO of BNSF weighing the pros and cons.  Just cause the low hanging fruit has been discovered "why don't we do precision rail roading?" - there could be other reasons THEY ARE NOT SAYING so the competition doesnt figure it out.  they know what is going on, they have looked at it 100000 times.  they have employees who have left competition to come to BNSF and explain it and then the CEO make decision.  

 

Easy for us to own the stock certificate and lob in the suggestions from the cheap seats.  Its much harder to be in the arena.  The bet is they will figure it out.  

 

[xboojum]

I think it's fair to say that we may have reached the limits of the strategy Buffett has been running for the last fifteen-plus years of sending money from the subsidiaries to BH and then from BH to the utilities for investment. If Western utilities are truly permanently a worse business due to wildfire risk (I have my doubts, but it's certainly possible) despite all the tax benefits of investing in renewables and BNSF is going to be hobbled either relatively because they don't do precision scheduling—or absolutely because of labor disputes or repricing in the industry (which, again, I have my doubts); there are no elephant-sized private businesses on the scale of a Mars or even, IDK, Sheetz that Berkshire can buy at a reasonable price (this one I buy); and there aren't outlets where Buffett is willing to make purchases in the public markets (there certainly don't seem to be many currently), where does the money go? Japan? South Korea? Fighting regulators to buy Chubb? Opening up a Flying J on every corner?

 

The secondary reason that the Apple purchase was so good is that it's one of the few places where Buffett could pour essentially an unlimited amount of money without personally distorting the market, and it's a little frustrating if unsurprising that he didn't choose a second tech titan that could also support $30-50 billion of investment back when they were priced less breathtakingly.

I think this is the top strategic problem Abel is going to have to tackle, because I don't think repurchases at $700,000 an A share make sense. I think personally there's still juice to be squeezed from utilities because I think a lot of the current issues are transient and utility boards are going to start offering incentives to bury lines and install monitoring, but even that only gets you so far (although it would be a big help), and it became pretty clear years ago that Marmon is not going to turn into a mini-Danaher the way I once thought it might. Having a subsidiary that supports large amounts of reinvestment at reasonable returns would be hugely beneficial as T-bill rates slowly come down.

 

[Edit to add] And this is why Buffett was so excited to work with 3G! A turnkey LBO shop with a reproducible set of behaviors that can be used to turn a pile of cash into a lean, mean consumer goods company gushing cash flow would have been incredibly valuable for Berkshire to partner with, possibly even more valuable (to Buffett) than having one in house because of the distance for avoiding reputational hit. But it didn't work out, because it didn't scale well and 3G had to target companies like Kraft that were a worse fit and/or everyone else caught up and/or all of the improvements that 3G brought were temporary and required increasingly-large acquisitions to keep the numbers going up as the sugar rush wore off. There's a reason that TerraVest, Constellation, Danaher, etc. get valued so highly.

Edited October 7 by xboojum

[Hektor]

Could WEB make an offer for Koch Inc? Charles Koch is not getting any younger.

[Jaygo]

I just dont see how making the company larger is going to help at all.

 

I'm not saying that something is broken but if i put myself in the shoes of management of a business would it really be better to be owned by a conglomerate?

 

Lets say WB went and bought Graco(ggg) a favorite of mine and a really exceptional company. Honestly its a perfect fit for BRK.

Right now Graco is like a big family, management can look at the incredible growth and feel proud, satisfied and eager for more of the same success.  Once they became part of Berkshire they would no longer have a share price to be proud of, they would turn from being one of the most successful companies in history to less than 1% of a Giant that wouldn't even make the pages of the letter. Great companies dont want to be hidden in a conglomerate.

 

I can just about guarantee the problems with culture would soon manifest. I think the future of BRK will be a dismantling via spinoffs if only to reinvigorate the love of the businesses remaining. I think it needs to be understood that in a post Buffett company the excitement of being purchased by the goat will be gone. 

 

That is not necessarily a bad thing even though it may be counter to what WB wants. 

[schin]

21 hours ago, longterminvestor said:

I think I understand what you are saying here.  But again, I think the framework of your thinking needs adjustment.  GEICO/BNSF does not take money from headquarters.  To my knowledge, it never has taken money from headquarters.  IF GEICO needed money from headquarters, then it would not be a wonderful business.  GEICO humms along doing what it does from internally generate capital at the subsidiary GEICO level. Can not remember officially if BNSF took money at first to do the capex projects or if it was just debt at BNSF level.  maybe someone knows that one.  

 

Now confusing the situation is fact GEICO is/has been getting smoked by competition.  I chose to think Mr. Buffett totally understands the issue and is solving to leap frog competition - not just make adjustments and "get back to par".  This is a FOREVER GAME and there is unlimited capital chasing a growing pie of customers/premium. Insurance, specifically admitted personal auto, is kinda annoying because you can sit there and watch how everyone else does it (quarterly filings, each state has their own filing system, you can basically watch your competition grow/shrink in front of your eyes (there are games with in the game).  and remember the lessons..."when you do dumb things in insurance, people will find you".  So I chose to think Berkshire is the smart one and everyone else is dumb but my incentive is to think that way so well aware of my bias.  Premium growth alone is not the yardstick GEICO cares about, its growth + profitable business.  Ajit is working on it, Todd C is working on it.  If it was easy, it would have been fixed already.  This is a tough game.  

 

Specifically to BNSF, its a duopoly in trains with trucking as the kissing cousin.  Precision rail roading is "a way" to do it but rail roading is also a complex game and maybe there are other reasons why they haven't done it.  We have to trust that Mr. Buffett, Mr. Abel are capable managers and put the decision to CEO of BNSF weighing the pros and cons.  Just cause the low hanging fruit has been discovered "why don't we do precision rail roading?" - there could be other reasons THEY ARE NOT SAYING so the competition doesnt figure it out.  they know what is going on, they have looked at it 100000 times.  they have employees who have left competition to come to BNSF and explain it and then the CEO make decision.  

 

Easy for us to own the stock certificate and lob in the suggestions from the cheap seats.  Its much harder to be in the arena.  The bet is they will figure it out.  

 

 

@longterminvestor - One of the major advantages of being purchased by BRK is its low cost of capital. It's so abundant that you should have an advantage from your competitors. Deep pockets and the 1-2% cost advantage should extend your lead.  It's like Masa/Softbank in providing financing so you can dominate.  The AAA credit rating at the BRK/parent level should provide some value.  When BRK looked into BNSF relative to UNP/NSC/CNI/CSX, I thought Warren would focus on the best management team and give them the advantage of low cost capital/float. Not free, but lower than if they went to Citibank, Chase, WFC, etc. The removal of an extra layer of fees from IBs alone should give the company an unfair, yet legal advantage.  If Warren was looking at an average cost operator with great management, you remove the quarterly SEC filing/compliance department overhead and reducing their cost of capital, you should get the lowest cost provider.   He could have purchased UNP, NSC, CNI, respectively and made them a king maker.  I sold out of my UNP and NSC accordingly -- because of this. I tendered my shares in BNSF too.  UNP has kept up with BNSF and might be better... even with the drag of reporting and higher cost of capital.. Progressive has too.... what makes Progressive so special that GEICO cannot replicate or how they insure better?  Progressive should not have as much human and financial capital as any BRK sub.   Who would have thought GEICO couldn't outspend them or introduced their own version of engine data analysis chip shortly afterwards?

 

In what world, would one supposedly have the best management team with deep financial pockets and still not dominate or be number one?

 

As for Greg, Ajit, and Todd airlifting themselves into BNSF and GEICO. The whole point of BRK is the corporate shouldn't off have the capabilities to manage the sub's business. BRK doesn't consolidate purchasing at the parent level.... essentially, they are offering capital allocation at that level only.. and the subs are left alone to manage accordingly. The fact that Greg, Ajit, and Todd are providing that expertise is not the original playbook. That's not the strategy.

 

Great management plus cheap, ample capital should equal long term dominance and competitive advantage.... that's not what I see in BNSF and GEICO. There's management drift or some mis-management there. I do not see Greg actively managing See's Candy... nor should he. He cannot scale like that.. 

 

It's like having a team of Peyton Mannings, Tom Bradys, LeBron James... do they need coaches to tell them how to play? 

 

BNSF and GEICO is like Ben Simmons of the Nets or Jordan Poole of the Wizards, if anyone follows the NBA.

Edited October 8 by schin