Warren Buffett on 3G Private Equity’s SideAuthor: Matt Hattam
Buffett defends 3G Capital
Last month multimillionaire Warren Buffet used his annual letter to Berkshire Hathaway shareholders to show his allegiance to aggressive private equity partner 3G Capital, stating they ‘could not be better partners’.
Berkshire Hathaway, which owns 90 business in areas including insurance, railroads and food, saw a 21 per cent increase in profit last year, registering incomes of $24.8 billion.
But there was clearly a need for Buffett to set the record straight with regard to the multinational’s commitment to 3G, with the world’s third richest person dedicating ten per cent of his 18,000-word letter to the matter.
Are 3G really that bad?
Buffett’s collaboration with 3G has been questioned by many shareholders: the firm having acquired a reputation for excessive interference with newly-acquired companies. 3G, led by billionaire Jorge Paulo Lemann, first teamed up with Berkshire Hathway in 2013 to purchase H.J. Heinz, where 3G cut 7000 jobs in the first 18 months.
Last year, the pairing merged Heinz with Kraft Foods, where 3G expects to make cuts of $1.5 billion by 2017. The fact that Kraft Heinz Company’s net sales actually went down 5% since the takeover demonstrates 3G’s ‘margins first, volumes later’ approach.
3G implements a hard-line zero-based budgeting (ZBB) strategy, not relying on the previous year’s finance records and establishing what each department needs from the ground up.
Therefore, it is understandable that 3G’s methods come under scrutiny, especially from those with shares in Berkshire Hathaway, a company that has always sought minimum interference in its acquisitions.
All about the profits
If there was one take home from Buffett’s letter, it is that productivity is the crucial factor in determining the success of a company, and even a nation. This explains the 84 year-old’s praise of 3G, admitting in his statement that the two companies ‘follow different paths’ in their ‘passion to buy, build and hold large businesses’, but lauding 3G’s ability to increase ‘output of desired goods and services per working hour’.
This cannot be disputed: Heinz Kraft’s operating margin could touch 25% this year- before 3G’s acquisition, Heinz and Kraft Foods had operating margins of just 14 per cent and 10 per cent respectively.
Buffett made his admiration of Jorge Paulo Lemann’s company clear, insisting that their methods ‘significantly boost productivity, the all-important factor in America’s economic growth over the past 240 years’.
His emphasis on productivity was backed up by his comments on the coming elections, when he refers to America’s current generation of youngsters as ‘the luckiest crop in history’, calling out candidates who are critical of the country. He predicts many more sunny days for ‘America’s golden goose of commerce and innovation’.
Let’s stay friends
Kraft Heinz’s estimated annual sales of $27 billion will ensure that the Berkshire Hathaway-3G Capital alliance will be consolidated, and this could lead to further ventures from the pair.
3G will likely focus on expanding their food empire- General Mills, a food manufacturer with a large US presence, looks a probable target. Whoever they choose, it’s a safe bet that 3G’s innovation strategy will stay the same, despite claims of excessive aggression.
You may not like their style but, as Buffett reiterated, they know how to come up with the goods.