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Owen
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Formerly an engineering manager, I now specialize in R&D corporate tax consulting. My investment style is Graham- and Dodd-based value investing.
  • Buffett's Next Sell Order 1 comment
    Oct 10, 2012 4:22 PM | about stocks: BRK.A, BRK.B, MDLZ, KRFT

    Berkshire Hathaway's 13F filing with the SEC is always a source for excitement. What did Buffett buy? What did he sell? The financial news services are abuzz with speculations and explanations. So, trying to beat the rush, I will make my prediction now as to what he sold in the third quarter, the one that ended yesterday: Kraft Foods Inc.

    I know, not much of an earth-shattering prediction, seeing as Buffett has been gradually reducing his holding of Kraft for the past two years. We know that Buffett's ideal holding period is "forever", so any sale is usually an indication of trouble. So what went wrong with Kraft? The numbers tell the story.

    Berkshire originally owned 138,272,500 shares of Kraft. The first sign of trouble was in the March 2010 quarterly 13F, with a 22.8% reduction in the number of shares held. This is the same quarter when Irene Rosenfeld, Kraft's ambitious CEO, decided not to walk away from her thwarted attempt to buy Cadbury for £10 billion. Instead, she chose to continue the hostile takeover battle with an increased bid of £11.5 billion. Buffett referred to this increased price as "fully valued", which if you're familiar with his lingo, is a polite term for "overpriced". In a rare move for the legendary investor, he voted against the takeover, going head to head against Rosenfeld. To the best of my knowledge, this was the only time in history when Berkshire publicly fought a CEO of a company they own. I have no doubt this caused Buffett much anguish and sleepless nights.

    After that battle was over, with Kraft paying top dollar for Cadbury, Berkshire maintained a fairly constant holding of 105,214,584 shares of the food giant until mid-2011. But then more bad news started coming in. Now, Buffett is no stranger to financial hardship, but there are certain types of management incompetence he finds particularly abhorrent. In addition to the high price Kraft paid for Cadbury, they soon had to spend an extra $1.3 billion in integration costs to achieve "synergy savings" - a term that gives Buffett's partner, Charlie Munger, the hives. And after publicly vowing not to close an historical factory in the UK, they went ahead and did just that, selling the old plant for £50 million, which works out to less than half a day's worth of sales for the company. The production line was moved to Poland. The laid-off workers' request for an explanation was rudely turned down.

    Throughout these events, Buffett kept gradually reducing Berkshire's holdings of Kraft. The rate of these sales sped up after Rosenfeld announced her plans to split the company in two - an attempt to undo the Cadbury purchase, but likely at a far worse price. Except that this wouldn't really undo anything. The money spent to buy Cadbury, with its now substantially lower profits, is gone. Distancing the Kraft name from the unfortunate merger by calling the new entity Mondelez International is a purely cosmetic action, and if there's anything Buffett truly finds ugly, it is lipstick on a pig of a financial statement.

    As of the last 13F, Berkshire held 58,826,390 shares of Kraft. I believe this is the last time we see Berkshire own any Kraft shares.

    Disclosure: I am long BRK.B.

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  • Author’s reply » My prediction was wrong.

     

    While Berkshire sold 48% of its holdings of Kraft in the quarter ended September 30, Buffett chose to hang on to 30.5 million shares. The shares are liquid enough to get rid of that amount in a few days without moving the market, so I doubt liquidity was the issue.
    21 Nov 2012, 09:33 AM Reply Like
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