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As the shareholders of Kraft Heinz (NASDAQ: KHC), Krupa Global Investments believes that Warren Buffett and 3G Capital are beginning an interesting maneuver around KHC. The release of the fourth quarter results was a nightmare for investors: $ 15 billion reduction, dividend reduction, lower EBITA outlook for 2019 and announcement of an SEC investigation. 3G Capital, which runs Kraft Heinz, probably knew that this information would significantly affect Kraft Heinz's shares, without having laid the foundation for publishing this information in previous publications or investor events. There was no warning about the profits, their statements when publishing Q3 2018 results were mostly positive as to their prospects and they stated that they did not think that costs marketing and other additional costs would occur in Q4.
Based on our experience, this procedure is typical when management and larger shareholders want to take a private company at a higher valuation. The management of KHC, led by 3G, did the most obvious thing when calling the fourth quarter results: it completely emptied the table. This allows Kraft Heinz to look attractive with a more modest valuation. After a 30% reduction in the stock price, a buyout that investors may have badly accepted just a month ago now looks great. After the significant reduction in the share price, it is likely that investors such as Warren Buffett and 3G Capital would pay a premium of 15 to 30% over the market price in a privatization transaction. Bloomberg journalists Craig Giammona and Katherine Chiglinsky drew similar conclusions about Kraft Heinz's next steps, based on their conversations with their sources:
We are not new to these types of maneuvers. We had the same type of behavior in our previous relationship with AmTrust Financial Services, a mid-sized insurance company based in New York.
We believe that AmTrust's management has deliberately reduced the value of its shares by eliminating the table slowly over a period of a few months. They put in additional reserves of US $ 300 million, postponed one of their quarterly results and announced that the FBI and the SEC were investigating their accounting practices. The investigations were unsuccessful, but the announcement, combined with other factors, had a significant impact on the stock, increasing it from $ 30 to $ 9 per share in one year, in the absence of fundamental changes in the activity. After this significant decline, the controlling Zyskind / Karfunkel family partnered with Stone Point Capital, a leading private equity fund with exposure to the insurance industry, led by former Goldman Sachs executive Steve Friedman. . We can clearly see the parallel here with 3G Capital as the majority shareholder and Warren Buffett / Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) as a strong shareholder experienced in the property sector. current consumption with $ 112 billion in cash. from Q4 2018.
With respect to AmTrust, SPC has taken a significant stake in Amtrust and announced that it would privatize Amtrust for a 25% premium on the lowest price of its share, approximately $ 9 per share. This equates to a valuation of $ 12.25 per share. We expect 3G to do a similar maneuver here. In the AmTrust case, KGI launched a militant campaign in which we imposed two successive price increases, the second with the help of Carl Icahn, at a final price of $ 14.75 per share (this which, in our opinion, was too low).
Here we see a huge parallel between AmTrust and Kraft Heinz. Management write-downs, SEC investigation for a negligible $ 25 million, decrease EBITA estimates without notice to shareholders, and major shareholders in search of low-cost acquisition targets price. This is an opportunity for activists to step in at this point and for Warren Buffett to take the company behind closed doors at fair value.
We firmly believe that 3G Capital has just prepared Kraft Heinz for a buyout. KGI has been campaigning for a few months for a privatization deal (Marketwatch article) because we believe that Kraft Heinz can be transformed more easily without the noise of quarterly reports and macro-economic events such as the US-China trade negotiations over the past year. Action on a daily basis. As Buffett mentioned in his interview with CNBC a few days ago, he has no intention of selling any shares of Kraft Heinz and he believes in management led by his partner, Bernardo Hees. We believe that Buffett believes that the company can achieve much better results in several years and that the current price of its shares makes it an attractive acquisition.
The shareholders of Kraft Heinz have experienced an unprecedented situation in recent weeks, which has been a disaster for small retail investors who have lost their retirement savings, college funds and more bets on what should have been a sure dividend. We believe that it is finally an opportunity for a potential win-win scenario for investors Buffett, 3G and Kraft Heinz.
Disclosure: I / we have no position on the actions mentioned, but I could initiate a long position on KHC over the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
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