Buffett’s Berkshire hit with $4.9 billion Kraft Heinz charge

NEW YORK – Mr Warren Buffett’s Berkshire Hathaway Inc took a US$3.8 billion (S$4.9 billion) impairment on its Kraft Heinz stake – the latest hit to an investment that has weighed on the billionaire investor’s company in recent years.

Berkshire marked down its carrying value of the Kraft Heinz stake to US$8.4 billion at the end of June, according to a regulatory filing on Aug 2. 

Mr Buffett’s Kraft Heinz stake has been a rare disappointment for the investor.

While he is still in the black on his investment, the stock of the packaged foods giant, which was created in 2015 through the merger of Kraft and Heinz, has fallen 62 per cent since then. During the same period, the S&P 500 has risen 202 per cent.

Kraft Heinz is now contemplating a spin-off of part of its business as it grapples with headwinds, including inflation weighing on consumers’ spending and people seeking healthier alternatives to its products. 

In July, the company posted a decline in sales that was not as bad as analysts had predicted, in part thanks to higher prices.

Mr Buffett’s company said the sustained decline in fair value was part of the reason that the firm marked down its stake.

But it said it also considered the fact that Berkshire gave up seats on the company’s board and Kraft Heinz is eyeing strategic transactions.

“Given these factors, as well as prevailing economic and other uncertainties, we concluded that the unrealised loss, represented by the difference between the carrying value of our investment and its fair value, was other-than-temporary,” Berkshire said in the filing.

Mr Buffett’s conglomerate owned 27.4 per cent of Kraft Heinz stock at the end of June.

Mr Buffett’s cash pile ended up dropping 1 per cent in the three months through June, to US$344 billion, the first time in three years that the war chest has shrunk. Those funds had previously kept soaring to all-time highs as he struggled to find opportunities to invest.

He ended up taking a more cautious approach to the stock market in the second quarter. He was a net seller of other companies’ stocks during the period, offloading about US$3 billion of equities.

Mr Buffett even steered clear of Berkshire’s own shares, forgoing any stock buybacks.

He has been on the sidelines for repurchases for roughly a year now, despite the stock falling 12 per cent after he announced in May that he would step down as chief executive officer at the end of the year.

Berkshire had a weaker second quarter at its operating businesses. Profit dropped 3.8 per cent to US$11.16 billion, driven by a decline in underwriting earnings at its insurers. 

Its car insurer, Geico, posted pre-tax underwriting earnings that rose 2 per cent to US$1.8 billion in the second quarter.

The unit’s underwriting expenses surged 40 per cent in the period, as the company spent more to increase its policy count. 

At its railway, BNSF, operating earnings rose 19 per cent to about US$1.5 billion, an increase Berkshire attributes to increased productivity and a lower tax rate.

The unit, which Berkshire acquired in 2010, has been caught up in dealmaking speculation in recent weeks. Two major competitors, Union Pacific and Norfolk Southern, struck a US$72 billion deal to create the first transcontinental railway operator.

Berkshire’s utilities business, which runs Pacificorp, MidAmerican and NV Energy, posted a 7 per cent increase in operating earnings.

The company said it is currently evaluating the impact of US President Donald Trump’s tax Bill, as the piece of legislature accelerates the phase-out of clean energy production. BLOOMBERG