Warren Buffett today (10 August) appeared to pour cold water on the prospect of Kraft Heinz Co. making a move for Mondelez International in the near term.
Some industry watchers had suggested the newly-formed Kraft Heinz – in which Buffett, alongside co-investor 3G Capital, owns a 51% stake – could make a play for Mondelez after activist shareholder Bill Ackman invested in the Cadbury maker last week.
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Ackman's Pershing Square Capital Management has paid US$5.5bn for a 7.5% stake in Mondelez, with speculation he could be betting on a bid for the business.
The Wall Street Journal, citing unnamed sources familiar with Ackman's move, said the investor believes the Oreo owner must grow its top-line faster, cut costs further or sell itself – and believes Kraft Heinz could potentially bid for Mondelez, a deal that would see the Kraft stable come together after it split from the snacks giant in 2012.
However, there was some debate about when – if at all – Kraft Heinz could lodge a bid for Mondelez and, in an interview with CNBC today, Buffett suggested the processed cheese-to-ketchup group would be unlikely to look to make a major deal in the short term as it integrates the former Kraft Foods Group and HJ Heinz.
"I will listen to anything my friends at 3G want to do but with Kraft Heinz we have our work cut out for us for a couple of years. I think it is quite unlikely. You never want to say anything is impossible but I think it is quite unlikely that Kraft Heinz would be doing a big acquisition in the next couple of years," Buffett said.
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By GlobalDataHowever, he added: "Somewhere down the road, I wouldn't be surprised but it also would have to make sense financially and frankly most of the food companies sell at prices that it would be very hard for us to make a deal – even if we had done all the work needed at Kraft Heinz."
Buffett was asked if buying Mondelez at its current share price would not appeal to him. The US billionaire investor and founder of the Berkshire Hathaway investment fund suggested a deal would be hard to strike that would suit him and his partners at Brazil-based private-equity firm 3G. ""It would be hard for us to make a deal that makes sense but who knows what happens down the line," Buffett said.
He also suggested the share prices of some US-listed food companies had been affected by the market expecting they could improve margins to the extent had been achieved at Heinz since Berkshire Hathaway and 3G bought the business in 2013.
"If you look at Kellogg or Campbell Soup Co. or Mondelez, they are prices that, to some extent, the market has put into those companies' prices that reflect an expectation Kraft Heinz-type margins are possible. That may be the case but I have not seen it elsewhere."
Like many of its peers since 3G, with its renowned focus on costs, entered the food manufacturing sector through the acquisition of Heinz two years ago, Mondelez has faced pressure to go further on improving margins, despite some work in the area.
"Given that Mondelez is under explicit shareholder and activist scrutiny over the company's margin expansion potential– we believe that the company is likely to increase its margin targets sometime soon," Sanford Bernstein analyst Alexia Howard wrote in a note to clients last week after Ackman's investment in the Milka maker was disclosed. "Furthermore, it is also possible that Mondelez faces activist pressure to sell itself to someone like Kraft Heinz Co., who has the cost-cutting expertise from 3G."
Last month, in a report setting her recommendation on Kraft Heinz's shares and weighing up the new group's options for corporate development for the next five years, Howard said she expected the company to make another acquisition "in two to three years".
Howard argued there was "no one clear next acquisition within US food" but suggested General Mills could be the "most attractive next step" for Kraft Heinz before adding: "One possible multi-stage scenario is for Kraft-Heinz to acquire General Mills first, then Mondelez, and then
[PepsiCo snacks arm] Frito-Lay in a food / snack industry roll-up not unlike the beer roll-up in AB InBev. This could result in circa 20% annualised capital gains for Kraft Heinz shareholders from current levels."
3G has been the driving force behind the creation of Anheuser-Busch InBev, the world's largest brewer, through a series of deals over the last decade.
Howard added: "It is possible that the Kraft transaction was a precursor to an exit strategy for 3G Capital and Berkshire, and that 3G does not have any future plans for the company. However, Berkshire Hathaway and 3G Capital are committed to long-term ownership of Kraft-Heinz, and it is clear that long-term value is created when further acquisitions are made."
Ackman is reported to be personally invested in 3G. According to the WSJ, in 2010, Ackman invested in a fund 3G raised to take Burger Kind private. Last year, Burger King merged with Canadian coffee chain Tim Hortons and Ackman's Pershing Square is a shareholder in the combined business.
Ackman, meanwhile, will be the second activist shareholder on the Mondelez board. Nelson Peltz, another investor with a history of agitating for change at other food companies, took a seat on the Mondelez board in January 2014 after pressing for the company to combine with PepsiCo, another business in which he had built a stake. Upon becoming a Mondelez director, Peltz ended his calls for a merger but said he would instead focus on getting the Pepsi cola and Lay's crisps maker to split in two, which the food and beverage giant has resisted.
Ackman and Peltz are seen as two investors who pushed for the creation of what became Mondelez. The two men were investors in the old Kraft Foods Inc and are said to have agitated for the company to break-up. Three years ago, Kraft spun off US-focused Kraft Foods Group and became the snacks-centred Mondelez. In March, Kraft Foods Group combined with the 3G and Buffett-backed Heinz.
