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The markets took it on the chin today, with the Dow Industrials losing almost 300 points — and many momentum stocks getting hit harder. But one legendary investor apparently hasn’t lost his faith in stocks.
Indeed, I don’t know if Warren Buffett does his own grocery shopping. But I do know he likes to shop for food and beverage companies.
That’s because the Berkshire Hathaway (BRK/A, Weiss Ratings: A-) billionaire and 3G Capital Partners just reached a deal to fold Kraft Foods Group (KRFT, Weiss Ratings: C+) into H.J. Heinz Co. The transaction will create a global food behemoth with annual sales of $28 billion — and every brand from Jell-O desserts to Heinz ketchup to Planters nuts to Maxwell House coffee to Velveeta and Polly-O cheeses under its corporate umbrella.
The complicated deal will result in Heinz shareholders owning 51 percent of the company, and Kraft shareholders getting 49 percent. Owners of Kraft shares will also get a hefty $16.50-a-share special dividend, funded by the Brazilian firm 3G and Berkshire. That puts the transaction’s value at about $46 billion.
|Buffett’s Berkshire Hathaway will have $9.5 billion worth of the new company’s stock.|
The new firm will trade publicly. Heinz Chairman Alex Behring and Heinz CEO Bernardo Hees will retain those roles for the combined company, while the board will have representatives from both firms. Kraft Heinz will be the fifth-largest food company in the world after the transaction closes.
Why are Buffett and 3G doing this deal? Well, 3G has been fairly acquisitive over the past few years — buying Burger King and Tim Hortons, as well as Heinz. Buffett has also publicly said he’d like to do more “elephant”-style deals with all the capital he has on hand, in addition to the smaller transactions he has launched (a topic I covered last month here in Money and Markets).
Moreover, deal financing is easy to obtain given ample liquidity and still-low interest rates globally. That’s why larger and larger transactions are becoming the norm, not just in the consumer food sector but also in industries like health care, tech, and biotech.
|“Larger and larger transactions are becoming the norm.”|
I didn’t have Kraft as an official recommendation in my Safe Money Report unfortunately. But I do have another “Steady Eddie” sector firm in the model portfolio — and its shares just tagged a fresh, all-time high thanks to strong core sales and earnings growth.
I wouldn’t be surprised if that stock catches a further bid on this M&A news. Ditto for a separate, smaller sector player that’s in our model portfolio and has been growing via acquisition itself.
I can’t share those names here. That wouldn’t be fair to my paying subscribers, as I’m sure you understand. But, otherwise, you can consider investments like the iShares U.S. Consumer Goods ETF (IYK) and PowerShares Dynamic Food & Beverage Portfolio (PBJ), two ETFs that own several food companies including Kraft.
In the meantime, what do you think of Warren’s latest grocery aisle deal? Is this a smart transaction that will create a thriving global powerhouse? Or is Kraft just a lumbering giant with processed food products that doesn’t appeal to today’s health-conscious shoppers?
Who else might be on his shopping list? And do YOU have any favorite stocks in the sector? Let me know over at the Money and Markets website!
|Our Readers Speak|
The Germanwings crash and the Ted Cruz declaration were two very hot topics over at the website, with opinions on both varying widely.
Reader deerflyguy stepped up to defend Cruz against his detractors, saying: “What this country needs more than anything is a ‘conservative’ leader who can think on his feet and not have to rely on a teleprompter to remind him of his position. Conservative bashers don’t know what they are talking about. Most of this country’s problems can be traced back to ‘liberal’ programs that have often fallen into the abyss due to being idealistic in promotion, but unsustainable in practice.”
Reader Jim also joined in saying: “The Progressives have such a grip on our vital institutions it is going to take a monumental effort to reclaim them. A warrior like Cruz is our only real hope, someone who can capture the imagination of those 30-40 million people who don’t vote anymore because they have lost faith in our system and have literally given up hope.
“I don’t agree with some Libertarian views but as a Conservative, I feel I must look the other way and join them to defeat the cynicism choking our country. The Left has had their chance and they failed miserably.”
But Reader Chuck B. argued that Cruz is off-base with some of his positions. His view: “As I read the original Constitution (before amendments), its purpose was to limit the powers of government, and allow the people to live their lives pretty much as they pleased, so long as individuals respected other individuals rights (except for the slavery clauses). The Ayatollah Cruz seems to want to tell everyone how to live their lives according to his plan.”
Reader Tom B. also said Cruz leaves a lot to be desired as a presidential candidate: “I cannot understand why this man is so negative about important issues facing our country. He has been against everything and everyone since he got elected. He offers no specifics. He cares only about himself, is self-centered, and without a conscience. Not a man to be trusted with our country.”
Meanwhile, regarding the latest air tragedy, Reader Dave offered his take on what might have caused the crash:
“I am a pilot and an anti-terror specialist. Unfortunately, airplanes don’t ‘accidentally’ crash after a slow, controlled decent that lasts eight minutes, with no cockpit communication. Just like planes don’t accidentally fly into the World Trade Center.”
But Reader Cessnapilot suggested something other than terrorism might have been to blame: “Since the plane just came out of inspection, MIF — maintenance induced failure — would be a good guess as to cause if the maintenance took place at the point of departure.
“A pulled breaker for the cabin pressurization system could render everyone gently out cold during the climb and dead at FL380. The gentle descent is consistent with the autopilot failure to capture altitude hold — either because it wasn’t programmed, or the plane was being hand flown. Or fire that disabled radios and crew.”
Finally, Reader David B. added: “I’m not a pilot but my nephew is, and is a command pilot flying the A320 for an American airline. He has told me that the A320 is a very sophisticated computer controlled plane, and he has found himself occasionally puzzled by its behavior and himself a bit ‘behind the aircraft’ in terms of control. Could this be somehow connected with the unusual flight pattern of the Airbus as it rapidly descended from 38,000 feet?”
Thank you very much for the theories and the other comments. We can only hope to get some relatively quick answers from investigators on scene and the airplane’s data recorders, given how many A320s are in service around the world.
Keep the comments coming in at the website!
|Other Developments of the Day|
The investigation into the crash of Germanwings Flight 9525 is underway in southern France. Unfortunately, the plane went down in a remote, hard-to-reach area where helicopters can’t even land and recovery workers can only reach by hiking for hours on foot.
The Airbus A320’s cockpit voice recorder has been found, and officials are hopeful it will yield data on what happened. Searchers also found part of the other “black box,” which contains flight data from the plane’s instruments. But its memory card is reportedly missing. The dead consist of many German and Spanish citizens, as well as three Americans and a handful of citizens from other countries
The battle for Yemen intensified overnight, with Houthi rebels fighting against troops loyal to President Abdu Rabbu Mansour Hadi. For the U.S., that means the loss of a base it had used for counterterrorism operations. The increased regional chaos could also allow Al Qaeda and ISIS forces to operate unimpeded in the area.
New home sales blew away estimates yesterday, rising 7.8 percent to their highest level since April 2008. Now, maybe the housing market will get an extra dollop of help from rising rents.
This Bloomberg story notes a trend I’ve discussed for a long time — namely, that Millennials haven’t been as enthusiastic about homeownership as other generations before them.
Some have been content to rent rather than own for the flexibility it provides, while others simply can’t afford to buy because they have too much student debt and too little money for down payments. But the story says more Millennials may be forced to cave in and buy because renting is getting much more expensive.
Want to comment on these news stories? Then use this website link to do so!
Until next time,