Heinz, Kraft and Warren Buffett

Rob Armstrong (0:06)

Pushkin. It's July grilling season in America. Hot dogs, hamburgers, ketchup, mustard. Today on the show, Sizzling on the Grill, we have a tale of Warren Buffett, condiments, and private equity.

John Foley (0:26)

And I've brought a six pack of non-alcoholic Budweiser.

Rob Armstrong (0:34)

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, I'm coming to you from a tropical and sweaty New York City. I am joined by the editor of the Lex column, John Foley, who is always cooler than the other side of the pillow.

John Foley (0:57)

Rob, Unhedged is the Egyptian cotton sheet of the financial podcast world, and it is a pleasure to slip into it.

Rob Armstrong (1:06)

What's the news, John? What are we talking about today? What brings us here?

John Foley (1:10)

So, Rob, we're talking about Kraft-Heinz, which seems to be thinking about breaking itself up into at least two parts, which is fascinating for those of us who have been following companies and M&A for many, many, many years, because Kraft-Heinz only got together about a decade ago through a merger of Kraft and Heinz, and it's one of the more dramatic and convoluted corporate structuring and restructuring stories that I've covered in my time as a product commentator.

Rob Armstrong (1:37)

I love this tale. And so, let's get in the Unhedged time machine and head back to 2013 when Heinz, which was then a successful, well-known if somewhat stodgy packaged food company, is purchased by a private equity firm called 3G Capital in cooperation with Warren Buffett. Now everybody knows who Warren Buffett is. Tell us a little bit about 3G.

John Foley (2:08)

So 3G is a private equity firm founded by some Brazilian financiers that had this idea that you could ruthlessly cut costs at big, mostly consumer-facing companies using a thing called zero-based budgeting, which was a financial fad that picked up in the 70s and was championed by Jimmy Carter. So Jimmy Carter thought that it would be good to use zero-based budgeting, which is where you basically make every department, every year justify every cost from scratch.

Rob Armstrong (2:37)

It was not a success for Jimmy Carter. No. He tried to be Doge before Doge and it never took off.

John Foley (2:45)

It's not dissimilar from what Elon Musk and Doge were trying to do. So they tried to inflict that upon those companies, actually Heinz, they did it for Burger King.

Rob Armstrong (2:55)

Most famously for beer. This was their first big success. Again, I don't want to harp on how long we've been doing this, John. But when we were young men and beer drinking young men, you and I remember a world in which there were a lot of beer companies. And now, there are not a lot of beer companies. And that is because of 3G, which rolled up like half of the world's beer companies into the monstrosity we now know as AB InBev.

John Foley (3:22)

Right. So AB InBev was the pinnacle of this craze for crunching together beer companies. It was the merger of Anheuser-Busch, which makes Budweiser, and InBev.

Rob Armstrong (3:32)

Which makes Stella Artois, right, among other things.

John Foley (3:34)

And it was a real merger of cultures as well, right?

Rob Armstrong (3:37)

Yes.

John Foley (3:37)

A family-led US business, the most American thing you can think of, Budweiser.

Rob Armstrong (3:42)

Yes.

John Foley (3:43)

With Stella Artois, which is the least American thing you can think of.

Rob Armstrong (3:46)

That was back in 2008, and it was seismic at the time, I remember. The idea that Bud would be a global rather than an American company was just a shock at the time.

John Foley (3:56)

So they were riding high. And when Kraft and Heinz merged in 2015, this was seen as a great thing.

Rob Armstrong (4:02)

Right. I want to make a minor point here. I'm rarely right about anything, as my friends know. But I did say when they bought Heinz, when Buffett and 3G bought Heinz in 2013, I said, I don't think this is a good deal. It looks like he's paid a lot of money, big premium for a company where there may not be that much cost to take out. But two years later, when Heinz goes on to buy Kraft, there is great excitement and the stock kind of goes bananas and amazing things happen.

John Foley (4:34)

Right. And I think Kraft was trading at $36 billion. That was the size of the company before this deal. Heinz paid 52 billion for it. And by 2017, the merged company was worth almost 120 billion.