On February 14, 2013, Berkshire Hathaway and investment firm 3G announced a deal to buy H.J. Heinz (HNZ) for $28 billion, or $72.50 per share. Naturally, Warren Buffett, not being one to get the short end of any stick, is investing only $4.4 billion in Heinz common stock and another $8 billion in preferred shares yielding approximately 9%. The rest of the purchase is being financed through investment group 3G and bank borrowing.
According to the Wall Street Journal, Warren Buffett "…has previously expressed disdain for private-equity buyouts that employed excessive leverage." However, as the details of the acquisition have unfolded, it becomes apparent that the leveraged nature of the transaction is on par with the deals that Buffett has spoken out against. So what is the motivation of Warren Buffett to engage in such a transaction? In this case, the allure of an inflation hedge that performs much better than gold in high inflation environments and that is proven to succeed after the high inflation period ends.
In the past, we have been outspoken on the matter of investing in food processing companies instead of gold and gold stocks if you want to beat inflation. On December 17, 2008, we pushed the idea that Sysco Corporation (NYSE:SYY) is an inflation hedge that will beat gold and gold stocks. Our closing remark were, "…if you're of the mind that inflation is coming down the road, with all this liquidity being injected into the economy, then SYY might be a good "long-term" hedge against inflation (found here)."
In a December 1, 2010 article we re-iterated that value of inflation protection provided by food processors by comparing ConAgra (NYSE:CAG), to Newmont Mining (NYSE:NEM) during the gold bull market from 1974 to 1980. This was a time when ConAgra exceeded Newmont Mining by 10 times. Again, this was within the gold bull market from 1970 to 1980 (found here).
One article published as recently as September 20, 2012 was titled "Gold Stock Investors: To Beat Inflation Look to Food Processors, Producers and Distributors (found here)." In that article, we said, "As an alternative to the 'mines' of precious metal stock investing, we've recommended investing in food processors, producers and distributors that have a history prudent of dividend increasing policies to take advantage of the expectations of high inflation down the road."
We cannot emphasis enough the fact that there are vastly superior alternatives to gold and gold stocks if you want to beat inflation. Additionally, investment in companies like Heinz will be richly rewarded even as the period of inflation comes to an end. This will not be the case for gold and gold stocks, as found out by gold permabulls in the period from 1980 to 1999. This explains why Warren Buffett would be involve in the Heinz transaction, it is the appropriate alternative to buying gold or gold stocks if runaway inflation is expected down the road.
- Matt Wirz and Ryan Dezember. Berkshire Stomachs Leverage for Heinz Buy. Wall Street Journal. February, 14, 2013. http://blogs.wsj.com/deals/2013/02/14/berkshire-stomachs-leverage-for-heinz-buy.
Disclosure: I am long SYY.